Grant Thornton calls for IHT overhaul

The government should either scrap the current inheritance tax (IHT) system or make significant changes to make it simpler and fairer, according to a new report from Grant Thornton.

The firm is calling for a full review after it found that far fewer people are liable to pay IHT than is commonly thought.

A survey of 400 homeowners with properties valued at more than £250,000 found a high level of confusion about who pays the tax with 62% believing they are liable when just 3% of UK estates were subject to IHT in 2010/11, according to HMRC.

Francesca Lagerberg, head of Tax at Grant Thornton, said: "We extrapolated the best features from similar tax regimes in other European countries that could be appropriate for the UK and came up with a number of options to improve the system. We then used the survey as a barometer to test how they may be viewed.

Some of the key findings were:

 

 

Continued...

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Comments
frustratedwithhmrc's picture

Sure - let's keep the housing bubble inflated...    2 thanks

frustratedwithhmrc | | Permalink

Lagerberg added: If IHT is to be retained in some form, serious consideration should be given to introducing a main residence exemption.

Given that we have had a massive bubble created in UK house prices, which still hasn't been allowed to 'pop' due to the current nearly zero interest rates propping up the housing market, I hardly think that a further measure which would cause the top 3% of this countries highest earners (mostly based in the South East) to pour all of their money into having as large a property as possible to avoid IHT is a good idea.

Before the election, the Tories said they were going to raise the level of IHT to £1 million pounds. They should fulfill this electoral commitment as this will address the problem for the vast majority of the small number of the population still affected by IHT.

The difficulty is that in an environment of austerity they have to at the very least make such changes revenue neutral, which means reducing IHT at the cost of something else.

Housing domestic rates ....

JC | | Permalink

@frustratedwithhmrc

A certain degree of control could be exercised over the housing market if the government chose to do so

Simply have a flat percentage charged for domestic rates based upon the last property sale price recorded at Land Registry

i.e. - assuming a percent = 0.30% (after all if you can afford the house then - ergo one can afford running costs)

250,000.00 = 750.00
500,000.00 = 1,500.00
1,000,000.00 = 3,000.00
5,000,000.00 = 15,000.00
10,000,000.00 = 30,000.00

Easy to implement & change - furthermore, a fair way of bearing the burden of rates.

Presently, those with lower value properties are subsidising more costly properties. The current bands place a greater percent of the rates . v. house value on the lower end rather than spreading the load equally - clearly an inequitable situation in Camerons 'fair society'

Also would collect revenues during the life of the individual rather than after death when the wealthy have 'arranged' their estate

 

memyself-eye's picture

Great for me, better for mom and dad

memyself-eye | | Permalink

I bought my house in 1990, my parents theirs in 1955, they should be laughing at paying 0.30% of £5,000 each year.  

But what has the rates to do with IHT?

and ...

JC | | Permalink

@memyself-eye

Quite - overcomes the asset rich / cash poor scenario, whereby some elderly who bought their house many years ago cannot now afford to live in them. At the time they bought the property to live in and not to speculate, which arguably has been the cause of the 'property bubble'; after all houses should be for living not speculating.

In any event 0.30% on the Candy Bros (et Al) sale of a single property for £130m (0.30%=£390,000pa) should more than make up for any 'losses' on those in your parents position

Furthermore, the 0.30% would 'kick in' on their estate when the property was eventually revalued for IHT or sold in the interim

'.. But what has the rates to do with IHT? ..' - trading lifetime tax on property (rates(tax) - now) for IHT on death which can be avoided and is for some optional

andrewdiver's picture

People aren't bothered !    2 thanks

andrewdiver | | Permalink

In the current climate peoples concerns are for ensuring the tax system correctly taxes the exceptionally wealthy individuals & large corporates.  

There simply isn't the appetite from the man on the street to go to the expense of overhauling the IHT system which has always been classed as a voluntary tax.  

Any changes to tax legislation are simply free demand generation exercises for accountancy firms.  Let the government change things, accountancy firm uses the media to scare people and bingo huge demand for services.   

We should be using the limited government resources more appropriately than instigate an overhaul of this tax.

dbowleracca's picture

Abolish IHT completely

dbowleracca | | Permalink

I just don't understand why we have a system that taxes people on assets they have accumulated during their life from their post tax income?

I also think that we should introduce a flat rate of income tax of 25% and increase the personal allowance to say £10,000,thus protecting the lower income families.

If you only had to pay 25% tax then you would have very little tax avoidance because nobody would object to paying it - and a better thought out anti-avoidance rule would combat this.

Also, lower taxes encourage entrepreneurship because you don't get punished for being successful - I mean why should someone who has worked hard and become the best in their field have to pay HALF their income in tax??? What sort of incentive is that for anyone to try and succeed?

That's my thoughts anyway

Tax explained in beer

nekillim | | Permalink

Suppose that every day, ten men go out for beer and the bill for all ten comes to £100...

If they paid their bill the way we pay our taxes, it would go something like this...

The first four men (the poorest) would pay nothing.

The fifth would pay £1.

The sixth would pay £3.

The seventh would pay £7..

The eighth would pay £12.

The ninth would pay £18.

The tenth man (the richest) would pay £59.

So, that's what they decided to do..

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball.

"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by £20". Drinks for the ten men would now cost just £80.

The group still wanted to pay their bill the way we pay our taxes.

So the first four men were unaffected.

They would still drink for free. But what about the other six men? The paying customers?

How could they divide the £20 windfall so that everyone would get his fair share?

They realised that £20 divided by six is £3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man's bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

And so the fifth man, like the first four, now paid nothing (100% saving).

The sixth now paid £2 instead of £3 (33% saving).

The seventh now paid £5 instead of £7 (28% saving).

The eighth now paid £9 instead of £12 (25% saving).

The ninth now paid £14 instead of £18 (22% saving).

The tenth now paid £49 instead of £59 (16% saving).

Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.

"I only got a pound out of the £20 saving," declared the sixth man.

He pointed to the tenth man,"but he got £10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a pound too. It's unfair that he got ten times more benefit than me!"

"That's true!" shouted the seventh man. "Why should he get £10 back, when I got only £2? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison, "we didn't get anything at all. This new tax system exploits the poor!"

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and government ministers, is how our tax system works.

The people who already pay the highest taxes will naturally get the most benefit from a tax reduction.

Tax them too much, attack them for being wealthy, and they just may not show up anymore.

In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

understanding iht

oldersimon | | Permalink

It's a perfect example really. People who will come nowhere near having to pay it are terrified of IHT because the Express and the Mail bang on about it. It seems a bit odd to call for an overhaul of the tax because of a deliberate policy of obfuscation from the press !

How can anyone defend a tax

Mike Bassy | | Permalink

How can anyone defend a tax which insists that children left orphans by a catastrophic accident, must, as a result, also sell their family home to pay IHT ?

It's a cruel, heartless policy, levied when children are at their most vulnerable - an outrage to a civilised society. 

This law has to be changed to protect all children.   

 

 

Even more tax breaks for the    1 thanks

dwgw | | Permalink

Even more tax breaks for the main residence?  What a ridiculous suggestion, thanks Grant Thornton.  Hasn't an excessive dependence on property done enough economic damage?

With high youth unemployment and a looming pensions crisis that will force older people to seek work for longer, the last thing the economy needs is to tax mobility.  Linking rates to the most recent Land Registry transactions simply benefits those who can stay put and penalises those who choose, or have, to move.

Why is IHT an outrageous tax if it's levied on the previously untaxed capital locked into the main residence?  That's not a tax on already taxed income, it's a tax on exempt capital growth.  CGT on death would be fairer though.

The bar room example is another of those over-simplistic yarns that purports to speak a universal truth but actually makes no sense unless you apply an equally simplistic view of human nature.

As for the orphans example well, yes, life's terrible sometimes.  However, if only 3% of estates pay any IHT are we really to believe that orphans being forced to sell the family home is a problem of any statistical significance?  I've yet to come across such a case.  I'd be more concerned about the future care of orphans than the house they used to live in.     

 

frustratedwithhmrc's picture

This is not really about IHT though is it, it's about wills.    1 thanks

frustratedwithhmrc | | Permalink

Mike Bassy wrote:

How can anyone defend a tax which insists that children left orphans by a catastrophic accident, must, as a result, also sell their family home to pay IHT ?

It's a cruel, heartless policy, levied when children are at their most vulnerable - an outrage to a civilised society. 

This law has to be changed to protect all children.   

I agree that there are circumstances where IHT may seem harsh as you describe. The purpose of IHT is to act as a barrier to intergenerational wealth transfer, however since those with large estates are able to reduce or remove the impact of IHT by using trusts, it seems as if only the unprepared who are caught by this.

If IHT had risen in line with average earnings, the nil rate band would be about £560,000 or so by now, which would have removed the vast majority of estates outside of the scope of IHT.

In addition, in the event of the sudden death of parent(s), providing they have written a will, a decent STEPS practitioner should be able to get a deed of variation passed placing either the entirity of the estate into trust or at least sufficient to mitigate the impact of IHT. The problem only really exists where no will exists or professional advice is not taken.

dbowleracca's picture

This is the best explanation of taxes I have read!!

dbowleracca | | Permalink

nekillim wrote:

Suppose that every day, ten men go out for beer and the bill for all ten comes to £100...

If they paid their bill the way we pay our taxes, it would go something like this...

The first four men (the poorest) would pay nothing.

The fifth would pay £1.

The sixth would pay £3.

The seventh would pay £7..

The eighth would pay £12.

The ninth would pay £18.

The tenth man (the richest) would pay £59.

So, that's what they decided to do..

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball.

"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by £20". Drinks for the ten men would now cost just £80.

The group still wanted to pay their bill the way we pay our taxes.

So the first four men were unaffected.

They would still drink for free. But what about the other six men? The paying customers?

How could they divide the £20 windfall so that everyone would get his fair share?

They realised that £20 divided by six is £3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man's bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

And so the fifth man, like the first four, now paid nothing (100% saving).

The sixth now paid £2 instead of £3 (33% saving).

The seventh now paid £5 instead of £7 (28% saving).

The eighth now paid £9 instead of £12 (25% saving).

The ninth now paid £14 instead of £18 (22% saving).

The tenth now paid £49 instead of £59 (16% saving).

Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.

"I only got a pound out of the £20 saving," declared the sixth man.

He pointed to the tenth man,"but he got £10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a pound too. It's unfair that he got ten times more benefit than me!"

"That's true!" shouted the seventh man. "Why should he get £10 back, when I got only £2? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison, "we didn't get anything at all. This new tax system exploits the poor!"

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and government ministers, is how our tax system works.

The people who already pay the highest taxes will naturally get the most benefit from a tax reduction.

Tax them too much, attack them for being wealthy, and they just may not show up anymore.

In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

Same concept as the not raising pigs scenario ......

JC | | Permalink

Pigs letter:

http://tomgpalmer.com/2008/02/04/not-raising-pigs/

Slightly questionable reasoning/interpretation ('.. Lies, damned lies, and statistics ..' - Mark Twain) nevertheless it makes a good anecdote

The whole example is rather distorted by rounding, although, in fact the new total is broadly speaking divided over all the men in the same percentages as the original split & just rounded down (with the rounding differences added onto the tenth man to distort his share)

If everything was actually calculated to 2 dp then it becomes more meaningful and the new split is pretty much in the same percentage as the original split - therefore by accepting the first split there are no grounds for complaint with a later split on the same basis

The whole area of 'saving (33%, 28% etc.)' is rather a red herring, however, it has obviously worked as designed (to confuse)

Anyway a certain latitude has been accepted to make the point - according to my calculator (2 + 5 + 9 + 14 + 49) does not equal 80