Inheritance tax is hated, even though the vast majority of people are not wealthy enough to levy it on their loved ones.
Perhaps it arouses such revulsion because it is a tax on death, property, and the natural desire to pass on wealth from generation to generation, all rolled into one.
The 40 percent rate is also drastically high if you’ve accumulated enough assets to be liable for much of it, and the house price rise plus frozen thresholds is expected to drag many more families into the grid in the coming years.
So, given its unpopularity, what would be the best way to ease the burden of estate tax – perhaps raising the threshold, or lowering the rate levied, or just getting rid of it altogether.
Passing Wealth: People who inherit property in the hottest home price spots tend to be on the hook for the largest sums
Or is it an unpleasant need to keep public finances afloat – putting it on the water would bring in £7bn a year – or a fair tax on the rich that should be left alone, or even made stricter.
We asked money experts to discuss the pros and cons of reviewing estate taxes below. And if you have strong feelings about this, there’s a poll below that gives you a say.
> 10 ways to legally avoid estate taxes: Read a This is Money guide
How much is inheritance tax and who pays?
You must be worth £325,000 if you’re single, or £650,000 jointly if you’re married or in a civil partnership, for your loved ones to pay death benefits. This is the main ‘zero rate band’.
But there’s another hefty allowance, known as the ‘residence nil rate band’, which raises the threshold to a joint £1 million if you have a partner, own property and intend to leave money to your direct descendants.
Once an estate reaches £2 million, this homeownership allowance is deducted by £1 for every £2 above this threshold. It disappears completely at £2.3 million
If you’re worth more, your beneficiaries must relinquish 40 percent of your assets above that level to the government.
Only about 5 percent of deceased estates are subject to estate taxes, but this figure is expected to rise as the thresholds outlined above are frozen until 2028.
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People who inherit property in the most popular house prices, often through work or family ties rather than by choice, tend to win the largest sums.
Inheritance tax brought the Treasury £7.1bn in 2022/23, £1bn more than the previous year. And revenue is forecast by the Office for Budget Responsibility at £7.2bn this year, rising to £8.4bn in 2027/28.
Why is inheritance tax so unpopular?
“There’s a general sense that people should be able to pass assets on to whoever they want, especially when they’ve mostly already paid taxes on making the money and probably on investment growth,” said Richard Harwood, financial planner at asset manager RBC Brewin Dolphin.
‘The fact that the British have an affinity with home ownership also seems to contribute to the feeling that we should be able to pass on the family home to our descendants.’
Harwood adds that it is felt to be “one of those taxes that only rich people should pay – by which we mean people who are richer than us.”
And he notes the regional impact, because property values constitute a significant value of one’s estate, so this is a much bigger problem in London and the South East and may elicit less sympathy from people living elsewhere.
Inheritance tax is relatively lucrative, but widely frowned upon and reform would be a crowd pleaser, according to Quilter tax and financial planning expert Rachael Griffin.
‘More and more people are getting entangled in the inheritance tax net because of their assets,’ she says.
Massive inflation on top of the cost-of-living crisis disproportionately affecting young people means we need to make it as easy as possible for money to flow to the next generations, whether it be at the death of loved ones or, crucially, during their lifetime. ‘
Richard Harwood, financial planner at asset manager RBC Brewin Dolphin, and Rachael Griffin, tax and financial planning expert at Quilter
How would YOU reform the inheritance tax?
1. Raise the threshold
“The thresholds are frozen and have been for many years, so this could at least be seen as bringing inflation into line,” says Harwood. ‘From a political point of view, I suspect it would play well for ‘central England’.’
He thinks raising the threshold would still lead to a belief that only the wealthy should pay the tax, and that it would simplify things by reducing the number of estates that have to pay.
Griffin says exempting more estates by raising the threshold would provide relief for middle-class families, who were not the original intended target of estate taxes.
‘There are also aspects of inheritance tax that are ripe for simplification. The nil residence rate bracket, which reduces the amount of inheritance tax paid when passing on a primary residence, is complex and poorly understood.
“A much simpler approach would be to scrap it and raise the zero rate band. Between complicated rules about who is considered a family member, the provision for downsizing, and the ability to use it for second homes, the RNRB deduction is a puzzle for those navigating estate taxes.”
HEATHER ROGERS ANSWERS YOUR TAX QUESTIONS
2. Reduce the rate by 40%
This would lead to a reduction in tax revenue and is likely to displease many since the principle would still be in place, Harwood says.
‘Introducing a tiered rate, such as with income tax or stamp duty, might feel a bit fairer, but would create more complexity.’
He adds that financial advisors help many people manage their wealth to limit the effect of inheritance tax, and it’s also possible to give away and avoid wealth if you live long enough.
“So we have a situation where it can be reduced in many cases and there’s a certain amount of disparity between those who take advice and those who don’t. But that will always be the case if taxes have a certain complexity.’
3. Get rid of it outright
This would certainly be popular with those who would pay an inheritance under current rules, but also more generally because many consider it unfair, Harwood says.
The obvious problem is lost tax revenue, which should come from elsewhere, but there could be other unforeseen consequences, he warns.
“Many financial advisors help clients reduce potential estate taxes on their estate through perfectly legal planning. An example of this is investing in AIM-listed stocks. If inheritance tax were abolished, we don’t know whether such shares would fall in value because they would become less attractive to some.’
Says Griffin: ‘Proponents of eliminating estate taxes hail the move as a triumph for the spirit of meritocracy, pointing to the idea that someone may have spent a lifetime building wealth, paying taxes on that income, and should therefore rest easy. can rest. that their wealth will help future generations.
‘Abolishing the tax could help to boost wealth creation and thus the economy. Inheritance tax is also a notorious administrative burden, both for estates and for HMRC.’
But she warns that doing away with it altogether could put a hole in the budget and exacerbate an already bleak economic outlook.
The tax also serves as a wealth redistribution tool and helps bridge the widening wealth gap. The role of inheritance tax in the redistribution of wealth cannot be underestimated.
“The tax mainly affects the wealthiest households, with the top 10 percent of estates typically accounting for a large portion of the total estate tax bill.”
4. Change gifting rules
The government’s independent tax gurus proposed reforming complicated estate tax gift rules four years ago, but no action was taken.
Harwood says people could be given the option of making larger donations each year instead of £3,000 and would be immediately exempt from estate tax.
All donations above the exempt amount now escape inheritance tax after seven years. Perhaps reducing the seven-year rule could allow for a more effective and frequent gift of wealth.”
Griffin also proposes revising the gift laws, which are currently frozen in time, having been enacted in 1981 and have not been changed since.
“If the surcharge had followed inflation, the Bank of England’s inflation calculator would allow you to gift nearly £10,200 per tax year until the end of 2022.”
“Given the surcharge has been unchanged for over 40 years and given the economic conditions, it would be prudent to change this and give a much needed carrot to a public that has been in a lot of pain.
“Even if the various allowances are not increased to increase the number of people making lifetime gifts, all allowances could be aggregated into one annual exemption at a rate that better reflects current inflation.”
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