Stop dragging more people into paying Inheritance tax

April 04, 2016 3:58 PM

They say that only two things are certain: death and taxes, and perhaps the most painful moment for a family is when the two are sadly combined. The death tax runs contrary to the natural human desire to provide a better life for the next generation and is a blatant double tax on income or savings.

So the news that since 2010 the number of households forking out for inheritance tax has quadrupled from 10,000 to 40,000, is very unwelcome. Total revenues for 2015-16 are expected to be around a fifth higher than the previous year, around £4.6 billion, good news for the treasury but few others.

The effect of rising house prices has been to drag people into paying a tax that they would never have expected and while the government is making efforts to raise the threshold, it seems incapable of doing this in non-distortionary way.

The current system allows an inheritor to receive up to £325,000 Inheritance Tax free (£650,000 if the allowance is transferred on the death of the first partner), and the rest will be charged at 40%. And from 2017, there will be an additional tax-free allowance for the family home of up to £175,000 (£350,000 if transferred between partners) by 2020-21. If all transferrable allowances are used, this could make the total tax free allowance worth £1m.

While this sounds, at first glance, like an overdue good move, it does create a very odd incentive for those who might wish to pass on wealth currently held in non-property assets e.g. shares. As these other assets don’t receive the additional allowance, there is an incentive for those planning their inheritance to buy their way back up the property ladder in order that their inheritor might avoid a sizeable bill.

This would only serve to gum up the property market as large, expensive houses are bought or held onto by retired couples rather than being sold to younger families who need more space. To solve this, all sorts of additional rules have been introduced so that those downsizing do not lose their tax free allowance. A good idea has been rather soured by the extra complexity – and remember that Inheritance tax already counts for around a tenth of our gargantuan tax code.

So while taking individuals out of tax is a good thing, the future £1m threshold should apply to any asset class, not just homes. And ultimately the TaxPayers’ Alliance would argue that Inheritance Tax should be scrapped in its entirety otherwise yet more people will be dragged into paying this vicious levy as we have seen today.

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