Does inheritance tax have a future?

June 12, 2019

While inheritance tax (IHT) comes under scrutiny from the government, a paper presented to the Labour Party has suggested it should be abolished.

Labour Party proposals to kill off IHT and replace it with a gifts tax were reported across several newspapers last month. The coverage was somewhat creative, as the idea was in a paper prepared for the Labour Party primarily focused on reforming the taxation of land. The gifts tax section covered just half a page and did little more than revive a structure proposed over a year ago by the Institute for Public Policy Research (IPPR).

These proposals are not yet Labour Party policy – they will only be considered when the party prepares its manifesto for the next election, which could be as far away as 2022. However, it’s worth considering how IHT might be transformed into a gifts tax.

The major change proposed is that liability would shift to the recipient of a gift or legacy, instead of the person making the gift or bequest. This approach is common in other countries which levy estate taxes. The IPPR framework would make gifts and bequests totalling £125,000 (indexed to inflation) over a lifetime free of tax. Beyond that threshold, any amount received would be treated as income and taxed accordingly. The new tax would raise almost three times as much as IHT. The paper on land tax reform added one tweak to the IPPR proposals: a new tax on equity release which it described as a “key means of avoiding inheritance tax”.

Despite the relatively few estates that end up paying IHT, it is generally regarded as the UK’s most hated tax. However, IHT is much easier to sidestep than a lifetime gifts tax would be. Under IHT, the general principle is that outright gifts only enter the IHT calculation if they are made within seven years of death.

In a rare cheering move, the government announced in June that compensation payments from the German government to survivors of the Kindertransport, rescued prior to the Second World War, will be not liable for tax as part of those individuals’ estates.

If the impact of IHT on what your children and grandchildren will receive concerns you, now could be a good time to discuss with us the ways in which you can take advantage of the generous treatment of lifetime gifts…while it lasts.

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