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An illustration of an explosion AccountingWEB Should we blow the bloody doors off inheritance tax?

Should we blow the bloody doors off inheritance tax?


With both political parties taking excessive interest in inheritance tax, Philip Fisher wonders whether the politicians are taking things far enough.

26th Oct 2023
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While Jonathan Swift is best known for Gulliver’s Travels, he also wrote a witty satirical essay with the snappy title of A modest proposal for preventing the children of poor people from being a burthen to their parents or country, and for making them beneficial to the publick. If you don’t know it, seek out a copy.

No accountant could compete with such literary genius but, having taken an initial look at inheritance tax – this year’s hot tax or, at least, the country’s most hated – this article puts forward its own modest proposal that might just appeal to Rishi Sunak and Jeremy Hunt, as they attempt to reach the mythical land of sustained UK growth.

In response to the previous article, Mark Lee helpfully identified the source of the opinion that inheritance tax (IHT) is hated more than any other, pinning it down to Hargreaves Lansdown. Without wishing to denigrate that esteemed investment house, some might question whether their survey, which established that 24% of 2,000 respondents hated IHT more than any other tax, was based on sound statistical principles.

It may well be that 24% of Hargreaves Lansdown’s well-to-do clients have concerns about IHT, but they are hardly representative of the typical man or woman in the street. There is also a possibility that large elements of the media, not to mention many of the prime minister’s more strident backbenchers, might be going out on a limb to take potshots at a tax that only affects the affluent.

How else can you explain news stories suggesting that almost one-quarter of the country is against IHT when only 3.73% of estates are liable to it?

Some have suggested that the number of beneficiaries could be disproportionate but very few of those would even think about IHT, just being exceedingly grateful to have got an unexpected windfall from dear old Great Aunt Jemima, who they haven’t seen for a couple of decades.

Political posturing

We have now reached the point where the government of the day has jumped on the bandwagon and is leaking proposals either to reduce the rate of IHT from 40% to 36%, which will make no material difference to estates or the national debt, or abolish it completely.

On the other side of the House of Commons, the loyal opposition feels that an increase in rates should be under consideration.

Frankly, this is just political posturing from both parties. As others have pointed out, IHT currently makes a relatively small contribution to UK plc but it does have a rather more noticeable effect when one considers that now-outdated fad of levelling-up.

IHT is fairer and simpler to operate than a wealth tax and hits only those who can afford it, although one could argue that charging capital gains tax on all assets at death could be a reasonable and coherent alternative.

Fuss and nonsense

Looking at the government website, one discovers a set of really stunning statistics, based on the latest data available from 2020/21. That was the first year to be hit by the Covid pandemic but, even so, there were only 27,000 tax-paying IHT estates compared with 23,000 the previous year.

Given that the UK population is generally quoted at somewhere in the region of 67m people, this means that on average only one in 2,500 of the population was actually affected. Compare that with VAT, where one in one of the population is a victim and you realise how ridiculous all of the fuss and nonsense is.

The financial numbers are also telling. While the total tax take was £5.76bn, 81% of this came from the 4% of estates valued at more than £1m.

Taking this data into account, there could be a strong argument for raising the threshold considerably, thereby taking smaller estates out of charge but compensating for this by modestly increasing the rate of tax for estates in excess of (say) £1m. Closing many of the more popular loopholes would also bring in a pretty packet for the needy Exchequer.

The irony lies in the fact that while ministers and backbenchers constantly demand tax cuts, successive Chancellors have stealthily increased the tax burden on almost every taxpayer and, to add insult to injury, brought many more within the ambit of income tax by failing to raise the personal allowance in line with inflation.

Indeed, every current proposal seems to comprise tax cuts for the very rich to be paid for by the poor. This would be a good election strategy were it not for the fact that the poor outnumber the very rich by a factor of at least 20:1 and some might argue considerably more.

The modest proposal

Now for the modest proposal. Rishi Sunak and Jeremy Hunt are increasingly tending towards the tax strategies of their respective immediate predecessors, Liz Truss and Kwasi Kwarteng.

For those who have had the good fortune to forget about last year’s economic meltdown, this strategy worked on the counter-intuitive (all right – nonsensical) principle that, by reducing tax liabilities for the mega-rich, you would conjure up growth for the nation.

If Mr Sunak wants to take a bold step in this direction, then rather than abolishing IHT, which will only achieve modest growth, following the logic to a more extreme conclusion the obvious solution is to implement a negative inheritance tax awarding beneficiaries from all taxable estates with a 40% top up.

If the theory works, the supercharged double boost to the economy will be so great that Sunak and Co are bound to enjoy a landslide victory at the next general election. Then again…

Replies (7)

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By mkowl
27th Oct 2023 08:56

Replace it with capital gains tax on death seems the obvious solution. You have one set of reliefs that are consistently applied during lifetime and death

Thanks (3)
By vstrad
30th Oct 2023 10:17

Your pink slip is showing, as usual, Philip. There was no economic meltdown last autumn, with the minor exception of LDIs. The meltdown was almost entirely political.

Thanks (2)
By GMTax
30th Oct 2023 11:41

Lots of good points here, Philip. To my mind IHT is one of the least controversial taxes as it is never paid by anyone alive - and even in terms of what is received by beneficiaries, as you say, it only applies to the small number of estates that fall outside all the exemptions.

But on the points about a possible reduction in IHT from 40% to 36% it's worth reminding readers that it is ALREADY possible for any testator to get the IHT rate down to 36% (if the estate would otherwise be subject to IHT) just by leaving 10% of the estate to charity.

However, who is helped by this? It only benefits those who are are (non-charitable) beneficiaries of estates large enough to attract IHT (generally relatives of the wealthy) where the testator is willing to leave a modest share to charity but not too much. (If most or all of the estate is left to charity the IHT is £nil in any case, so there is no further benefit.)

It doesn't help charities very much because it does nothing to incentivise the really large residual legacies that account for most of the estate. Likewise it offers no benefit when charitable bequests are included in the vast majority of estates that fall below the IHT threshold.

So the beneficiaries of this concession are normally relatives of deceased wealthy persons who are happy to give a bit to charity but not that much.

Thanks (1)
Replying to GMTax:
By maxaca
30th Oct 2023 14:51

Not true that IHT is only paid by the deceased - the IHT tax take from relevant property trusts has increased exponentially in leaps and bounds since Gordon Brown's coach & horses driven through a millennia of trust taxation! It is now quite a sizeable chunk of the overall IHT tax take.

Thanks (2)
By agknight
30th Oct 2023 12:54

Why have accountants slipped into emotion in describing a tax proposal as 'nonsensical'?

There are examples of tax rate deduction, where the tax take increased in total. Tinkering with the 45% rate may have had a positive impact. Similarly a Corporation Tax rate of 25% sounds counterintuitively to be regressive. Finally the 40% threshold is impacting me personally and my actions and my proposals to clients.

We're regulated by pathetic bits of paper, whilst today opinions are bandied about as accounting theory.

Thanks (1)
By Tomazaan
31st Oct 2023 12:04

The people who pay IHT are not the dead but the living. Beneficiaries may be receiving large sums but they see even larger sums being paid over to HMRC. Most people in the UK rarely write cheques to HMRC so the shock of having to pay, say, £100,000 is considerable.
Whilst many people will never pay IHT, most of them aspire to acquire wealth and thus worry that their children might have to pay it.
The nil rate band has not been increased since 2009 so an uprating of that in line with inflation is long over due.
I would support abolishing IHT and making death a CGT event with the possibility of deferral until the asset is sold. This is what happens in Australia.

Thanks (0)
Replying to Tomazaan:
By JB101
01st Nov 2023 16:04

The trouble with CGT is establishing a Base Cost.
It's difficult enough to get accurate figures from the living (and details of dates, costs of acquisiton, enhancements etc) so wouldn't fancy trying to get this stuff from the recently deceased!

Thanks (0)