Inheritance tax is dead! Long live… inheritance tax?
How should we be taxed when passing on our wealth? The Intergenerational Commission gave its answer in a new report on the future of inheritance tax.
How should we be taxed when passing on our wealth? The Intergenerational Commission gave its answer in a new report on the future of inheritance tax, published earlier this month. Whatever your political persuasion, it is a thought-provoking read and full of proposals, such as limiting relief from inheritance tax upon business assets to £5m.
The report has even more radical ideas: proposing that inheritance tax is 'unfixable' and should be replaced by a new 'lifetime receipts tax'. Under this new tax we would be taxed on what we receive, rather than what we give.
Under the current rules, a married couple with a house could leave up to £900,000 to their children without their estate having to pay any inheritance tax. But what would the position be under the proposed lifetime receipts tax?
How would it work?
Let's consider the position of the married couple leaving their £900,000 to their two children. Each child would have a 'lifetime receipts allowance' of £125,000. After that receipts would be taxed at 20% up to £500,000 and then 30% beyond that.
Therefore, each child would have to pay £65,000 of lifetime receipts tax, a total of £130,000. This tax bill would reduce their parents' estate from £900,000 to £770,000. If the couple only had one child then he/she would have to pay £195,000, reducing the estate to £705,000. We've set out the calculations below.
The proposed calculations
With two children each child's tax bill could be:
With one child his/her tax liability could be:
The report estimates that by 2020, a lifetime receipts tax could generate £5bn more revenue for the government than inheritance tax. The aim is to redistribute wealth to promote intergenerational fairness, and the Commission points out that "of the two million people receiving some inheritance in 2015-16, only 140,000 would pay any tax and of those only 10,000 would pay the higher rate of 30%. The vast majority of those with any Lifetime Receipts Tax liability would pay the 20% rate – half the current marginal rate."
New rules would apply to lifetime gifts
As it is a lifetime receipts allowance, any gifts received by an individual in excess of £3,000 each year will count towards the allowance. This means that a gift or gifts made by parent to a child would count towards the allowance unless kept under £3,000 a year.
With the government's focus on Brexit, and with higher taxes not being popular with the electorate, the Commission's proposals are unlikely to become law any time soon, if at all. However, the rules on inheritance and other taxes do change frequently and so it is wise to review your Wills and estate plans every few years, particularly if your family, business or financial arrangements could change.