Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

Reforming IHT - by Simon Sweetman

by
27th Sep 2006
Save content
Have you found this content useful? Use the button above to save it to your profile.

It is my belief that the current crusades against IHT are ill founded, and that examples of real hardship caused by the tax are few and far between. Not everyone agrees, and there is no doubt that IHT, having been created by shoehorning irrelevant bits of old death duty legislation into the still largely experimental CTT, is an incoherent tax. Many European countries find an annual wealth tax a better option.

For the time being we must live with IHT. However, there are places where reform is needed. One case recently posted on a web site concerned two elderly people who live together in a house owned by one of them and worth some £500,000. Should the owner die first, the property ' the long term home of the survivor ' would have to be sold to pay the tax. She had willed him a life interest (though the freehold would ultimately go to charity), but that just becomes part of the problem. Marriage, said the person looking for help, was not an option.

The government of course had refused to extend the possibility of civil partnership to opposite sex couples, and in any case whatever the bar was to marriage might have been a bar to civil partnership as well.

The other case that is argued ' and which I suspect is equally uncommon ' is that in which the couple owning a property die accidentally in a car or an aircraft, leaving young children and a large tax bill. It is certainly possible, and one of the worst features of a death based tax is the way in which it can make a bad situation worse.

Now hard cases make bad law, and all moves to reform capital taxes are complicated by the knowledge that somebody somewhere is going to try to make a loophole out of a relief, and that somewhere on the margin somebody else is going to become a hard case. The Tory proposition that the family home should be exempt may remove the noisy middle classes from the threat of IHT, but will also be extremely welcome to somebody whose family home is worth £30 million, and would probably provide yet another upward shove to house prices by making the expensive home even more desirable. It has to be stressed that in the common case where the home is the major asset the parent dying is in their 80s and the inheritors in their 50s with perfectly respectable homes of their own and no intention of living in their parents' house, though they may decide to turn a penny by letting it rather than selling it. I cannot see that paying tax in this situation is unreasonable.

There do seem to be some lengths which people will not go to: the chain marriage, for instance, where the patriarch on his deathbed is required to marry an 18-year old so that the necessary items are thrown into the spouse exemption, seems to be a step too far. Mind you, it is not that far removed from some trust arrangements adopted by the upper classes in the past.

With that in mind, we would want to look for a more specific relief, which might for instance exempt the family home from charge if there was somebody still living there who had been the life partner of the person who had died, or where there are still people living there under the age of 25 who are the children of the deceased: and indeed it would probably be enough to defer the tax charge until the house was sold or the occupant died. Of course there will be people looking for cunning plans, but it ought not to be too difficult to sort out the real cases.

Over to you, Mr Chancellor.

Replies (12)

Please login or register to join the discussion.

avatar
By AnonymousUser
20th Oct 2006 12:09

New trust rules help
People like the sisters may get some protection from the new trust rules as well, particularly if the house value is currently below twice the threshold and they should live for seven years or more. Gifting a share of the house into trust gets it out of the estate, and the creation of a life interest for the settlor does not change that. 10 year charges will be minimal on an initial nil rate band trust, and CGT main residence exemption is still available.

[Edited to add 'twice the threshold']

Thanks (0)
avatar
By User deleted
02nd Oct 2006 16:58

jointly owned
I have recently received this advice from my will advisor, and can't quite see why it could not apply to the two sisters living together. If they owned the property as joint tenants, shouldnt the value of half the property drop out of the estate value, and the whole property pass to the surving sister, with no value used in the inheritance tax calculation ? Or has my will advisor told me a load of rubbish ?

Thanks (0)
avatar
By User deleted
28th Sep 2006 09:29

IHT is crude and full of nonsenses.
If the tax system recognises that providing for oneself and one's dependents is a motive which should be encouraged, then death duties are an attempt to qualify that principle by saying that heirs should not enjoy unlimited wealth, some of which should accrue to society as a whole-hence exemptions for gifts to charity, for example.

IHT is a very inefficient way of putting these conflicting objectives into effect.

The Irish system makes far more sense. It taxes the heirs on their cumulative inheritances, regardless of from whom they inherit, but with a differing scale of exemptions depending on the relationship between the deceased and the heir.

Some detailed points:-


Why is BPR/APR 100% without limit?

Why not link the changes to a partial lifetime CGT charge on homes, with rollover relief?

If IHT were scrapped and substituted with CGT on death, that would anyhow have to be linked to a specific charge to CGT on homes [say on values in excess of £500k] and the rolled over charges would then become payable..

Thanks (0)
avatar
By Caber Feidh
03rd Oct 2006 01:40

Avoiding IHT
The advice from Driscoll's will adviser certainly appears to be wrong as he has described it. The surviving joint tenant does automatically inherit the deceased's half share but this share is still subject IHT. However, there would be no IHT if (i) the sisters owned their property as joint tenants, (ii) all their other assets were either held jointly or were of equal value and (iii) the total value of their combined estates was not greater than twice the IHT zero-rate band (currently £570,000). There will be a lot of IHT when the second sister dies but, by this stage, they will both be beyond caring about it.

Turning to Simon Sweetman's hard case of a young couple dying together in an accident and thereby incurring a double IHT bill, to the detriment of their children. Surely this can be avoided with careful drafting of their wills so that there are 28 day survival clauses in bequests between them? If the second to die does not survive the first to die (assumed to be the elder in the absence of other evidence) by 28 days, then the bequest bypasses the second and goes directly to their children. Of course, they would need to own their home as tenants in common, not as joint tenants.

Caveat: Do not rely on the accuracy of the above statements but seek your own legal advice.

Thanks (0)
avatar
By Paul Soper
02nd Oct 2006 15:23

Oh dear....
Simon writes...

examples of real hardship caused by the tax are few and far between.

Bearing in mind that at current rates only 6% of estates pay IHT it may well be that examples are few and far between but...

In the last few years rising property prices have seen an increase from 4% to 6% in the numbers of estates caught and the future, if the tax is left unreformed, will see many more estates being caught, and along side that you will see more cases of hardship.

The two old ladies, as sisters they are unable to marry or create a civil partnership are but one example. Why indeed, on the death of the first should the home of the second be sold? However there are also many people who act as carers to elderly parents, friends and relatives, giving up their own lives to care for the elderly and saving enormous amounts for the exchequer in doing so, who are similarly compelled to see their home sold to pay this iniquitous tax.

In 1992 the labour party referred to the combination of CGT exemption on death and 100% BPR as a Double Tax Relief, and a relief too far. So why not consider restricting BPR to 75% (so that the liability on a business at death would be the same as a disposal of the business during lifetime) and use the proceeds to either exempt main residences from the tax where it constitutes reasonable provision for a survivor, or at least allow the IHT liability on the residence to be deferred without interest.

Thanks (0)
avatar
By mrtrub
02nd Oct 2006 14:09

Death Duties/IHT inherently difficult
Because of the very high marginal rates needed to get even small amounts of revenue, & because the tax tends to fall at a time of stress (financial & otherwise) on the family, IHT must have many exceptions & special provisions & even so often causes completely unintended hardship.
For example, the family firm sold off may lead to a real deterioration in working conditons for employees, or the firm may be squeezed of cash at a time, with the most capapble ownere/manager gone & a new young inexperienced owner in charge.
In Australia the decision was made to scrap IHT for these reasons. In general, it hes not caused the country any problems.
On a personal note, I have taken part in keeping a family business alive until sale after my father died, with IHT the firm would just have gone under.

Thanks (0)
avatar
By AnonymousUser
02nd Oct 2006 15:36

Rare?
You say "rare" - I had two US IHT cases in the past three years, and of them, only one owed UK IHT. You guessed it, single parent with three kids aged 18 - 24 having to sell their family home because they couldn't afford to keep it. Not only do they have to deal with mum being gone, they don't have a place to go on break while at uni. And we all know uni dorms close for various holidays - where are these kids supposed to stay during the holidays? They'll have to rent an apartment for use 10 random weeks a year? How pointless and a waste of their remaining assets.

Thanks (0)
avatar
By geoffemtacs
30th Sep 2006 10:01

Entrenched views
I think you either see concepts such as progressive taxation and redistribution of wealth as right or not. It's impossible to convert people from one viewpoint to another and to label Simon's views as class envy is simply to verbally throw stones from your side of the fence.

It's equally possible to use perjorative language to describe those who argue against IHT and Higher Rates of tax (rich getting richer, Thatcherite 'no such thing as society' concepts, blah blah), but there's little point in doing so.

The key question is what makes this a better world for us to live in and that doesn't always derive from a wealthier world

Thanks (0)
avatar
By Mike Bassy
29th Sep 2006 13:14

naked envy - yet again.

By littering his article with disparaging reference to "middle classes " and " upper classes", Simon Sweetman clearly reveals that his support for IHT is, yet again, based on naked class envy rather than fairness.

Despite writing at length, his wordy argument can, in fact, be accurately condensed to : " Those rich buggers can afford it, so tough".

How tiresome. Yet another professional extoling cloth cap virtues while driving a Volvo to some leafy suburb.

Class consciousness has been a curse for everyone in this country for centuries. Isn't it time to grow up ?


Best wishes.

Thanks (0)
avatar
By AnonymousUser
28th Sep 2006 12:28

Holdover relief
It would be very simple to provide an interest-free holdover relief for payment of the tax in the circumstance where the property is the home of a person living there; has been the home of that person throughout the [2 years] prior to the decease in question and for so long as it continues to be the home of that person. In this case, the property in question might only qualify if, and for so long as, the person living there has no rights over any other property in the UK. I say it should be interest-free because the beneficiaries would otherwise bear a double hit: they will not only receive a deferred entitlement to the asset whilst it remains in occupation but also an increased tax burden by reason of any interest charged.

I would not have thought that the cost of this relief would break the exchequer.

Thanks (0)
avatar
By User deleted
27th Sep 2006 11:11

A fairer way...
I think that some people can find IHT very distateful where they have created wealth themselves that has already either been taxed to income tax via salary and/or capital gains tax through the sale of a business/shares in a business.

Whilst my view is that IHT is not an ideal tax, I think it could be administrated much better. In my view the nil rate band should be unique to each taxpayer and should be set at the level of all taxes paid by that individual throughout their lifetime. Therefore people do not suffer taxation on the same income/gains twice. From this allowance you could also deduct any benefits the individual has had from the state during their lifetime.

That way, an individual who makes a significant contribution to public revenue is not penalised for also being a prolific saver and likewise, those who inherit vast fortunes pay a proportionately greater share of their assets in IHT.

Thanks (0)
Richard Murphy
By Richard Murphy
27th Sep 2006 15:38

As ever, I agree Simon
I'd also like to spike the guns of those who are bound to say (becasue they always do) that IHT is unreasonable because it is double taxation. I've dealt with this argument here
http://www.taxresearch.org.uk/Blog/2006/07/31/lets-be-clear-inheritance-tax-is-not-doube-taxation/

Thanks (0)