Tax the living, not the dead

Inheritance tax forms © Getty Images
Abolish inheritance tax and replace it with a gift tax

I’ve written here several times about how inheritance tax could be reformed – a subject I know is close to the hearts of many MoneyWeek readers.

One of my suggestions has been to abolish it completely and to replace it with a gift tax. This would mean taxing not the estate of the dead person, but the recipients of the cash, for whom it should considered unearned income (detail here). You could then tax it at the same rate as either earned income or as dividends, depending on which method created the least confusion/admin hell at HMRC.

This would, I think, have two happy effects. As the tax would be nothing to do with the estate, the elderly would know that avoiding it was not in their power, something I suspect would relieve them of a great deal of stress (MoneyWeek readers worry a lot about finding ways to avoid inheritance tax). It would also have an element of  progressiveness the current system does not have (the lower your income-tax band on receiving your gift the less you pay). Good isn’t it?

I’m pleased then to see that the Resolution Foundation’s Intergenerational Commission is now pushing a similar (if rather more complicated) idea. It would like to see what it calls a “Lifetime Receipts Tax”. Everyone would get a lifetime allowance for the receipt of cash/asset gifts (it suggests £125,000). Anything received beyond that would be then be taxed in bands – 20p in the pound up to £500,000 and 30p after that.

I like this idea – it takes the strain from the old (they can’t avoid it); it encourages a wider spread of wealth (the more people you leave your cash to the less tax is paid) and it’s not too tough (the marginal rate stays lower than it is now).

But I prefer my own idea for the simple reason that the very, very last thing the UK tax system needs now is yet another raft of tax bands and rates. It would also be quite hard to argue against – after all, it means that someone inheriting £500,000 would net a handy £425,000. But still, it is good to see some thinking at least going in the right direction.

  • Julian Lloyd-Hitt

    I agree with all of your article.
    A further point is that your idea might then see a greater spread around of any inheritance perhaps also to grandchildren or more distant relatives and dearest friends.
    It would benefit those persons with more than the standard 2.4 offspring or stepchildren. It seems rather unfair that a single child might get up to £1m tax free if its last surviving parent died with a substantial house/savings. Yet if it has, say, three other siblings all of them get to the tax free limit at £250K. And above that HMRC takes 40%.
    Why are you not Chancellor of the Exchequer, Merryn?

  • kidmugsy

    The logical thing would be to subject it to Capital Gains Tax. After all, a Capital Gain is precisely what it is.

  • Michael T

    Good to see MoneyWeek considering the full cradle to grave life cycle for people’s wealth management.

    Having spent a lifetime of working, building some wealth and preserving it (with the help of Moneyweek of course!) its great to be reminded that the more wealth you build and die with the more the taxman gets.

    It does rather defeat the point of the lifetime objectives.

    • AAJ

      “It does rather defeat the point of the lifetime objectives.”

      …if your lifetime objectives are solely to procure wealth.

  • Malcolm

    Lifetime allowance a mere £250,000?

    The tax system is complicated enough already and keeping track of a lifetime allowance from all donors will not be easy to say the least.

    And will there be exemptions for such as University fees, which will take up a significant part of this allowance? With the huge increases in university fees, gifts to cover that plus accommodation expenses for children or grandchildren should now be exempted from IHT and any future gift tax.

    And if IHT were abolished altogether or raised to USA levels, more wealth would remain in the UK rather than departing for overseas tax havens and more will come here.

    https://wealth-monitor.com/news-today/migration-trends-this-country-continues-to-attract-the-worlds-millionaires/
    “An estimated 11,000 millionaires moved to Australia in 2016 compared to 10,000 that moved to the US and 3,000 that moved to the UK”.

    • kidmugsy

      “university fees, gifts to cover that plus accommodation expenses for children … should now be exempted from IHT”: they already are.

  • AAJ

    Ideally, no wealth would be inherited. Of course, as a parent and if you have money you’d naturally want your offspring to inherit as much as possible and help then as much as possible. Whatever happens to your wealth, it’s a fine balancing act between perceived fairness, individual greed and dealing with the economic consequences of wealth being help by people who need it least, e.g. the day before you die you really don’t need that £million house in suburbia, where as a young couple starting a family really do need that wealth. At the same time you wouldn’t’ want that same person to frantically spend all their wealth upon the assumption they couldn’t give it to their family.

    Whatever system you have, it needs to be simple, perceived to be fair and with no loopholes. It needs to be a system whereby this doesn’t’ happen:

    https://www.theguardian.com/money/2016/aug/11/inheritance-tax-why-the-new-duke-of-westminster-will-not-pay-billions

    • David Woodcock

      Completely agree, however you should note that the twits at the top of the Labour Party do not really put their case against inheritance across. Even as succinctly as you have. I don’t think many people would argue against the principles of limiting inheritance to sensible limits so you have to question the sincerity of the people trying to introduce draconian taxes, as they must be aware that it will alienate a huge number of people.
      The Guardian article is interesting but typically not really suggesting anything concrete….. Merryn is at least proposing something. She should try to get one of those social media websites that attempt to get campaigns going to pick this one up.

  • Timothy Stroud

    There won’t be any intelligent discussion of changing the rules to inheritance
    tax under this chancellor. Far too risky. The much maligned George Osborne
    might have considered it, he took several good initiatives. Those days are over,
    and the bean counters are back in charge.

  • Triple H

    This is a shameful tax. How can you be certain that the new proposal, yours or not, cannot be bypassed and will not be bypassed by gifting to an off shore trust?
    I agree to have more taxes imposed to fund education and health in particular But that should come from the big businesses who are (encouraged by the Tory crony crowd) running circles around the taxman.

    • Farweasel

      Not sure I agree to more taxes to fund anything these days –
      There are many people in genuine need who deserve our help & support.
      But as it seems we have an awful lot of folk who are here under false pretences sucking funds out of all our services, my vote would go to plugging the hole in the bucket not pouring water in faster.

  • Brian Templeton

    Hello Merryn, You would like to transfer the sting of one of the government’s paths to revenue from those people who have passed away and can no longer feel it on to the backs of those still surviving in this country? Estate tax was originally designed to hit what the government felt was excess equity and certainly not needed by people that had passed on to the next world. If estate tax were to be eliminated then the government to maintain it’s revenues would have further increase the rates of taxation those still working and possibly have to further increase the rates because as you point out there are many ways that the financially aware, (Mostly the rich, with their well qualified accountants.) can avoid or side-step those additional punitive taxes so the burden of paying them would fall on the working poor who cannot afford to pay for professional advice. I am a person that many people would consider as well-off or wealthy, but I would never want to seek to further burden the people of far less financial equity then I. I believe that from all that you say that you are a member of a very wealthy family in England, and you wish to receive your any future inheritance without it being taxed in any way.

  • Anthony W

    Buy some gold sovereigns every now and then, and then, when you’re not feeling very well, give them to your children or friends. Is there an inheritance tax system that can beat this simple ruse?

  • Chris Narbeth

    Agree that Inheritance Tax should be abolished and that it only taxes the modestly wealthy or the unlucky (those who die prematurely) rather than the wealthiest. Also agree that a Lifetime Allowance makes more sense than a ‘lump sum’ tax at high marginal rate
    … but why not avoid all of this by simply having a ‘wealth tax’ instead.
    Rather than trying to collect 35-40% once a generation, why not simply have a wealth tax of 1% per annum on all assets above a threshold of say, 1 million.
    Keeps 95% of people fully exempt and provides no loopholes for the rich to avoid.
    Plus, it makes them better capitalists and improves the ‘free market’ ! Why ?
    How could an investment in a stock like Tesla / Netflix etc with a p/e > 100 make any commercial sense if you are going to be taxed 1% per annum on your non existent dividends and gains.
    Could also abolish CGT and Stamp Duty as well if this tax was applied to all property and investment portfolios

    • kidmugsy

      “why not simply have a wealth tax of 1% per annum on all assets above a threshold of say, 1 million.” That threshold is ridiculously high. £10k would be more like it.

  • Farweasel

    Hacked off with hearing how heavily taxing inherretance monies and stuffing it into the states coffers leads to greater ‘Fairness’. Its an utter lie and totally unfair.

    What I’ve made by working or trading I paid tax on.
    If I want to give it to my kids in what way is it ‘fair’ to tax it again?

    Regrettably, between the rob-you-blind Corbynistas and the insatiable greed of Government it looks inevitable that they’ll continue putting their hand as deeply in our pockets as they can. Against that background – sorry Merryn – I prefer the Resolution Foundation’s Intergenerational Commission’s proposal.

  • CHRIS W

    I honestly think this lifetime scheme is bonkers. All it will do is penalise families with fewer children (and hence probably grandchildren) and maybe encourage the really rich to breed a few more. If we are to tax wealth on death (by whatever route) then why not do the sums and look at how the wealth is created in the first place. Business and jobs creation? Or the pure luck of the ‘London property’ draw? For sure if you add up all the millionaires in this country it wont take long to realise that actually you are talking to a huge extent about the people whose houses are based in ‘lucky’ London – now able to move out to a mansion in Scotland or France due to their luck – and nothing much else. A good part of the other millionaires have earned it – and yes for the benefit of their family often with the goodwill and help and sacrifice of their family having been taxed all the way along (unlike London property wealth accruals). Want to do something really revolutionary-incentivise genuine wealth creation. Not hammer it again on death whilst giving popular vote-winning allowances to lucky London.

  • Michael T

    How do you instate a lifetime allowance for the receipt of cash/asset gift? For example, does it start when the law gets passed (i.e a set date in the future)? Does someone who has already received £1m at that point in time start from scratch no matter what their age? if not do they then owe back tax? How do you record and calculate “who owes what” and what might be exempt? Does “cash” need to be abolished perhaps? Does it include income or distributions from trusts? Does the 7 year PET status to date get wiped out and forgotten?

    etc..

  • Michael T

    Perhaps it is not principally the inherited money that a “Lifetime Receipts Tax” is intended to target? Reading the BBC report (http://www.bbc.co.uk/news/uk-44096507) on the UK rich list by the Times for this year, we learn that “Old money” is not necessarily where the wealth is any more.

    “Aristocrats and inherited wealth has been elbowed out of the list and replaced by an army of self-made entrepreneurs.”

    Now, younger very wealthy people like to give away money too to their relatives and friends, and are far more likely to live a further 7 years after doing so and therefore not be liable to pay IHT. It seems the recipients of their gifts would however be subject to the likes of a “Lifetime Receipts Tax” if it were instated.