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Affluent and expensive homes in London AccountingWEB Will inheritance tax be abolished?
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Will inheritance tax be abolished and what might replace it?

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As rumours mount about the government's supposed plans to abolish inheritance tax, Gravita’s Tom Adcock explores whether this will be the Chancellor’s pre-election rabbit out the hat announcement or if significant reform is on the cards.

20th Jul 2023
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After years of speculation, the government is seriously considering scrapping inheritance tax (IHT) ahead of the general election next year.

Whether it actually happens in the face of stiff opposition is far from certain, but a series of media reports over the past few weeks indicate that abolishing IHT is on the table and that has wide-ranging implications for accountants. 

While divisive and far from perfect, IHT makes a significant contribution to the Treasury coffers, with £6.1bn in receipts in tax year 2021/22 and a 15% increase in the first six months of 2022/23. Clearly, if IHT is abolished, some form of replacement will be required to plug the gap. But what might that look like and would it be any better than the current system?

Indeed, reform of IHT is just as likely as getting rid of it all together. The Institute for Fiscal Studies (IFS) has called for reform and said that IHT loopholes mean that the very wealthy pay on average half of the 40% IHT rate paid by the moderately wealthy. Or, as the IFS’s Paul Johnson puts it, “If all you leave is the family house it’s hard to avoid. If you have millions it is absurdly easy to avoid.”

Yet reform might not be the answer, particularly for a government looking to make a big statement ahead of the general election. With that in mind, it is time to start thinking about Capital Gains Tax (CGT) as a ready-made replacement for IHT.

I am surprised this is not more widely discussed as an alternative. CGT is a relatively simple solution that could be adapted for factors such as reliefs, charges on cash and applications to trusts that would make it function as a replacement for IHT.

The wider point is that CGT is what IHT should be. It is fair and easier to both administer and understand because everything that’s deemed to be sold, is done so at market value, which is what you then pay tax on.

Promoting fairness and reducing inequality

One of the key advantages of CGT is that it promotes a fairer distribution of the tax burden. Those who disagree with IHT argue that they have been subjected to tax on their earnings, as well as their spending, and are now unfairly burdened with a third tax upon their death on the wealth they have accumulated and not on a gain in the value of assets.

Adding to this burden is the huge increase in house prices over the past few decades. Despite a recent cooling in the property market, house price inflation has dragged more middle-class families into the IHT net, which reduces their ability to pass on wealth to the next generation. The threshold of £325,000 has remained unchanged for more than a decade.

With CGT on the other hand, it is likely that there would be a deemed disposal of the assets on death which would trigger the CGT charge. Clearly if there is no cash available to pay, the assets will have to be sold. The difference with CGT is that people would be paying tax on the gain in value and not on the market value of the asset which may not have grown in value at all.

Encouraging investment and economic growth

Investors love certainty and consistency and one of the loudest complaints from investors into the UK economy is the constantly changing tax environment and the perceived unfairness of some of the rules. Changing IHT so that it only taxes growth while protecting genuine business assets from tax would be a huge draw for investors both in and from outside the UK.

Connected to this, a shift towards CGT could make the UK a more attractive destination for foreign investors who crave a tax system that rewards long-term investments. With so much discussion around London’s position as a global financial capital, this would send a positive signal to the rest of the world. 

Looking ahead

The idea that we scrap IHT altogether is not novel and there are other examples we can look to for taxing wealth upon death. Ireland and Canada have historic links to the UK’s financial system and provide interesting alternatives to examine if an alternative system is required.

There is, however, a long way to go until IHT is abolished and even if it is, a new government might choose to reinstate it. Yet for the first time in a generation, there is a very real possibility of a significant reform or even a complete scrapping of IHT.

It is not widely discussed, but CGT is a simple, ready-made solution that could plug many of the gaps left by IHT while also supporting a fairer and more inclusive tax system. Why wouldn’t we consider it? 

Replies (13)

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By Hugo Fair
20th Jul 2023 18:05

This rumour was already reported by Justin within one of his comments on https://www.accountingweb.co.uk/tax/personal-tax/iht-have-your-let-prope...

But why the assumption that the only alternative to dispensing with IHT is reform of it or a direct replacement?

There's a lengthy list of countries that operate without any inheritance or estate taxes - starting with Australia and continuing through Cyprus and on to Dubai (to mention just 3 of which I happen to know about).
None are known to be reluctant to accept taxation revenues (not even Dubai), so what do they know and do differently?

I'm not any sort of macro-economist but I believe there's obviously an element of attracting inward movement of wealth ... which may provide opportunities for a canny govt.

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Replying to Hugo Fair:
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By Justin Bryant
21st Jul 2023 12:51
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By Hugo Fair
20th Jul 2023 18:29

"With CGT on the other hand, it is likely that there would be a deemed disposal of the assets on death which would trigger the CGT charge"
... so are you proposing the return of index-linking for base cost?

I'll admit to being biased, but what really gets my goat is being told that I've made a massive gain just because I purchased the house in 1974.
Over the ensuing 50 odd years I've probably spent approx. 50 times the original purchase price in maintenance/repairs/enhancements .... but, more importantly, my annual salary at time of buying the house had just teetered into 4 figures (having been £400 pa a couple of years earlier).

Net result?
I may have spent a lot of time telling a lot of people to 'not let the tax tail wag your decisions' ... but I make an exception for IHT for which I'll happily make decisions of dubious benefit to me personally if it diminishes the IHT tax take!

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By taxdigital
21st Jul 2023 08:39

If the current government abolishes IHT the Labour will score a point over Tories during the elections, going after Richie man’s wife’s tax status. For the Labour they need to show they care for the hoi polloi, so not too sure they can afford to get rid of IHT altogether which will only benefit Londongrad and the likes.

With IHT gone, trust and estate planning industry will go the dinosaurs way, non-dom status will be irrelevant, and all the billionaires will return to London.

You can’t get even a decent size toilet in London for the £325000 limit which was set some 15 years ago. So, IHT as a tax definitely needs a revisit. If indeed IHT is to go introduce annual wealth tax of 1% for those having wealth over £2m.

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Replying to taxdigital:
JD Portrait
By John Downes
21st Jul 2023 10:09

You were doing really well, but then you spoiled it with your final sentence.

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By Arcadia
21st Jul 2023 11:02

The public won't see the nuances of removing a tax which unfairly falls on the middling wealthy. They will see the average Jo and Joanna are paying out huge amounts extra for their mortgage and a tax on the rich is being abolished on the proceeds. So go for it - another nail in the Tories' coffin. And please don't say that interest rates are nothing to do with taxation - Bank of England independence is a figleaf.

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By anthonystorey
21st Jul 2023 11:03

If the government stopped wasting billions every year we wouldn't need so many taxes.

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By 0118295
21st Jul 2023 11:29

You are right that we "crave a tax system that rewards long-term investments", but CGT does the opposite because it is not indexed linked . (It used to be). It is an iniquitous tax because it taxes inflation. The longer you hold the asset, the more inflation you get taxed on. Therefore long term investment is actually penalised, whereas it should be rewarded.

Since the IHT threshold was frozen, property prices have more than doubled. So IHT is also a tax on inflation, as evidenced by the trebling of IHT revenues in recent years.

Restoring index linking, back-dated to acquisition dates, to both these taxes would at least make them fairer or less less unfair depending on your point of view.

Bold root and branch tax reform is what is needed, not the parsimonious Treasury tinkering and stealth taxes we've been getting for the past 2 or 3 decades. Unfortunately, anyone who tries it gets booted out - not by the electorate but by the unelected Establishment.

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By ireallyshouldknowthisbut
21st Jul 2023 14:40

Id abolish it

But add in a gift tax at a flat 25% on the the recipient given most IHT is ridiculously easy to avoid by giving away your cash before you die.

if the donor don't need it, tax it. Enforcement would of course be tricky.

I am a horrible lefty of course who believes in levelling the playing field and wealth through brains and hard work rather than luck of birth and entrenching wealth.

Quite out of place on here of course.

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By soundadvice
21st Jul 2023 14:53

I have felt for a long time that IHT should be abolished in favour of a tax on passive receipts like gifts, lottery winnings etc .. so it is taxed on the lucky recipient rather than the hard working donor!
For example when my parents died and I was fortunate to receive a nice inheritance I would happily have paid 20 tax on it; so I would still have received 80% of a nice sum.
I wouldn’t muck about with the current ludicrous spiders web of allowances, thresholds, reliefs etc etc it would just be a straight 20% on any receipts over 10,000.
Estonia have something like this indeed we could do a lot worse than replace the whole of our current tax system with their system. For example no Corporation Tax at all unless companies distribute profit.

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Replying to soundadvice:
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By 0118295
24th Jul 2023 10:58

A much lower rate of IHT - 20% being the BRT - levied on each beneficiary would be an improvement, though it still doesn't resolve the injustice of taxes on taxes and taxes on taxed taxes.

I also agree that CT should not be charged on undistributed profits because it removes investment funds from the business, especially SMEs, reducing their potential rate of growth. When it's distributed, tax the recipient. Unfortunately, it is an idea that will never fly. Far too sensible.

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By jon_griffey
25th Jul 2023 11:34

Tom, what you have overlooked with your suggestion to replace IHT with CGT is the major practical issue of establishing what the base cost is for CGT. If the deceased held various parcels of land, paintings, shares etc that they may have held for decades then the executors may not have the faintest idea whatsoever as to how they acquired them and for what base cost and so CGT becomes impossibly difficult. Add to this the difficulty establishing what the periods of main residence were since 1982, what holdover relief claims etc have been made. IHT avoids these complications altogether.

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