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Lifetime gift tax: Labour plans to scrap IHT

4th Jul 2019
Inheritance
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The shadow chancellor John McDonnell has indicated support for a lifetime gift tax, a bold proposal that would replace inheritance tax and rake in an estimated £15bn a year. What is this tax proposal, and who is affected?

One of AccountingWEB’s most-read stories in recent times concerned the death of Ken Dodd. Before passing away, the comic married his long-term partner and deftly swerved a potential inheritance tax bill of up to £2.6m.

As AccountingWEB’s editor Tom Herbert reflected at the time: “Death, of course, is a significant tax planning event”. Inheritance tax liabilities, with the help of a canny adviser, can often be substantially reduced.

To some, in particular but not solely the political left, inherited wealth is a source of great anguish. The argument is that inherited wealth is unearned and perpetuates a cycle of privilege at the expense of pretty much everyone else.

French economist Thomas Piketty has extensively detailed how inherited wealth and wealth inequality buttress one another. In his book Capital in the Twenty-First Century, Piketty’s analysis showed that inheritance is once again becoming the key route to wealth.

Piketty arrives at a worrying conclusion: the proportion of people receiving an inheritance larger than the lifetime earnings of the bottom 50% is set to return to 19th-century levels over the next decades.

The lifetime gift tax

Recently, the shadow chancellor John McDonnell made waves when he told Sky News that Labour was “looking at” a lifetime gift tax (LGT) to replace IHT. 

“We need to have a fairer system of how we can ensure that wealth is more fairly distributed – that’s one idea and we are listening to a whole range of ideas,” McDonnell said.

Regular readers of AccountingWEB might remember LGT from the Land from the Many report. One of the report’s authors, the economist Laurie MacFarlane, argued that “inheritance tax should be abolished completely and replaced by a lifetime gift tax”.

He continued, “this has been proposed by the Institute for Fiscal Studies as a more efficient way to tax inheritance. Any lifetime gifts over a certain amount should be taxed.”

Under LGT, tax would be levied on the gifts received above a lifetime allowance of £125,000. 

“When this lifetime limit is reached, any income from gifts would be taxed annually at the same rate as income derived from labour under the income tax schedule,” the report read.

An estimate from the Resolution Foundation states that taxing gifts through the income tax system would raise £15bn in 2020/21. That’s £9.2bn more than the current inheritance tax system.

One of Land for the Many’s authors, the writer and activist George Monbiot, told AccountingWEB he was “very glad” that Labour is seriously considering the LGT proposal. 

“I’m aware that there are formal processes through which potential policies have to pass within the party, including motions to the annual conference but I’m no expert on Labour party procedures. So I will await the outcome of those. Obviously, I would love to see our proposals adopted.”

Tax raid or fair play

The mainstream press hasn’t been kind to the LGT idea, to say the least. Scary headlines and rather superficial analysis of ‘trebling IHT’ abound. But LGT isn’t IHT. It would replace it.

“This is a different approach to taxation,” Monbiot said. “Not least because the tax is paid by the recipient, not the estate. The two approaches can’t be directly compared.” That point around the recipient paying is critical.

Geoffrey Todd, a partner at the law firm Boodle Hatfield, called this “a radical shift” along with “a much lower threshold before tax becomes due”. And there’s not really any way to avoid LGT, either.

For those seeking to minimise the impact of this new tax there are two obvious options, said Todd:

  • Accelerate the process of transfers of wealth to your children or grandchildren ahead of any possible Labour government.

  • Delay transfers of wealth until after a Labour Government in the hope that IHT will be reduced again.

The current proposals do include some conditional exemptions for business and agricultural property, however. “Tax could be deferred until the asset is sold or until the business ceases to be a trading entity and becomes an investment entity,” reads Land for the Many.

“This would allow families to maintain the integrity of agricultural land or business assets, but would also prevent inheritees from gaining large tax-free windfall gains. We believe that the cost and benefits of such an exemption need to be considered as part of the post-Brexit redesign of agricultural subsidies.”

What isn’t immediately clear, Todd said, was how LGT would interact with trusts. “Presumably, IHT on the trust itself will be abolished but distributions will be treated as lifetime gifts, subject to the new cap.”

It’s important, though, to remember the LGT proposal is long term. The report and its authors all recognise that to implement it “may take time”. Of more immediate consequence is Labour’s plans to reverse the Conservative government’s recent inheritance tax break for main residences.

Replies (17)

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By killer33
04th Jul 2019 16:45

This will be as toxic on the doorstep as the 'Dementia tax' proposal was for the Tories in 2017.

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By SXGuy
04th Jul 2019 18:48

Delusional labour once again. The average house price they quote is a joke. Where are they checking these house prices? Certainly no where near where I live down south.

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By EnglishRose
04th Jul 2019 21:29

It is a very difficult thing in practice. What presents to children do you include? What about paying for their school fees? Feeding them? Letting them live rent free at home with parents? What about funding their university fees? What level of the gift does it arise at eg £10 every day or just any one gift over say £10k? Would it include a present of a car? What if a parent pays for a gym membership?

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Replying to EnglishRose:
By ireallyshouldknowthisbut
05th Jul 2019 09:32

This is one of the main issues, however the aim with taxation is only ever to hit the big stuff (ie the £100k's) not the £100's here and there. I imagine you could put in a annual limit (say £10k) for 'gifts in kind' which in practice would only get a look in if people really take the P*ss, and tax what you can see, eg cash and assets where the title can be seen as passing such as property.

Right now I know (having worked regularly with solicitors on probate matters) there is very little done about lifetime gifts which ought to be within the 7 years. Its often only a cursory enquiry.

Overall I think its a better policy to take a little bit on a gift vs nothing on some gifts, and a big something at the end if the deceased's tax planning was poor. IHT is after all a tax on the ill-prepared, and the unexpectedly ill. I am not sure the rate ought to be the marginal income tax rate, perhaps basic rate would be more appropriate to 'sell' the policy, then its not a big deal to declare it.

Gift taxing is common in many other countries, and many of my clients (fairly international bunch) are often surprised that it does not apply in the UK.

One the biggest issues of fairness in society is inherited wealth, this just aims to level down the pitch a bit.

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Replying to EnglishRose:
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By schocca
05th Jul 2019 14:28

Considering that school fees for 1 child at a day school is currently £250K over the whole period (including sixth form), this could be a big issue.

Uni is another £70-90K. (assuming that the parent needs to pay for everything and student loans are inaccessible)

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By TheChief
05th Jul 2019 10:00

Labour really doesn't like the working man/woman do they. I wonder what they would waste the £9.2 billion on?

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By VIOLA55
05th Jul 2019 10:08

I agree with the LGT in principle as it would be hard, if not impossible (unlike IHT), to avoid. It might be better to have say a £125,000 lifetime limit but then with tax rates above that which increase based on the level of gifts received. For example, 10% above £125,000, then 20% above £250,000, 30% above £500,000 and then 40% above £1m. I think it's wrong to treat a gift as a top slice of a person's income. With trusts, a capital distribution someone receives from a trust could be treated as a gift, but to deter trustees from stockpiling value there could be a charge similar to the 10 yearly anniversary charge, but based on a flat rate (and ignoring the nil rate band and IHT position of the settlor when the trust was created) perhaps arising more frequently than 10 years. LGT - a good idea in principle and should not be as complicated as some are suggesting (certainly not as complicated as our current IHT regime) because there would be the need for lots of anti-avoidance rules, many of which are necessarily present in our complicated tax code.

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By justsotax
05th Jul 2019 10:15

they could probably take advice of the Tories - equally incompetent at spending money in an appropriate manner to benefit the themselves.

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By djn24
05th Jul 2019 10:23

I agree that IHT needs to be reformed. Too easy to find ways around it.

I think that keeping the IHT limit would be fairer and then tax the difference at maybe 25% rather than 40%.

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By We're_all_mad_here
05th Jul 2019 10:25

What this article doesn't explain is how the recipient is supposed to pay the tax if they are gifted an asset over this ridiculous threshold. I.e. property of £300k given and the Marxists want their pound of flesh. what if the recipient is not cash rich? Are they forced to sell the property to pay the tax?

Absolutely ludicrous policy and given the recent polls I'm glad that they're slowly moving into oblivion.

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By pauljohnston
05th Jul 2019 10:32

I am not sure that the very low start figure will help the cause.

From my view much inherited wealth is tied up in the house we live - giving it to our children means that they too can own a home rather than mortgage until; death.

In the UK we have this disparity of house prices so for me LGT is a non-starter because those in high house cost areas end up with a lower standrard of living than those in a low cost area. I apprecioate incomes are also lower but this still has to be sorted before talking about a lower limit.

In spain there is an annual tax on property (and maybe assets) above a certain figure. When I dealt with it it was 0.5% on a figure of over £750k. I would see this as a faired system.

Why do we need this idea. Its all based on absolute wealth rather than on what type of assets.

As others have said it appears to be politicians wanting to raise more for pet projects

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By mickeyparish
05th Jul 2019 11:48

You pay half of what you earn over to the Goverment to waste as it sees fit, then half again of what you have already been taxed on. Rape and pillage ! No point in bothering is there ?

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By mickeyparish
05th Jul 2019 11:52

You pay half of what you earn over to the Goverment to waste as it sees fit, then half again of what you have already been taxed on. Plunder and pillage ! No point in bothering working to save is there ?

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By supremetwo
05th Jul 2019 13:39

Seem to be lots of people posting here who are all for raising more tax without question as to what it will be spent on.

I suppose if/when making tax digital becomes the norm, all our bank and savings accounts details will be scrutinised to allocate to the lifetime tax pot.

Big brother gets even closer.

But let me offer an opposing view:-

Abolish IHT altogether (or raise the exemptions to USA levels) and more wealth will remain in the UK rather than departing for overseas and more wealth will come here.

That wealth is likely to generate more income tax, more VAT, more council tax and more employment opportunities than IHT.

https://taxfoundation.org/estate-and-inheritance-taxes-around-world/
"Thirteen Countries or Tax Jurisdictions Have Repealed Inheritance or Estate Taxes Since 2000"
Macau 2001, Portugal 2004, Slovak Republic 2004, Sweden 2005 Russia 2005,
Hong Kong 2006, Hungary 2006, Singapore 2008 Austria 2008, Liechtenstein 2011,
Brunei 2013, Czech Republic 2014, Norway 2014.

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By [email protected]
05th Jul 2019 13:53

Surely if Chavistas get voted in (even if it is by accident) this will so depress asset prices no one will be paying IHT, LGT or similar in any case. And the CGT take will similarly implode.
No cause for concern about their tax proposals, no one will make a profit to tax!

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By moneymanager
05th Jul 2019 14:11

If the tax is paid by the recipient and they are UK dom non tax resident who pays the tax especially as most regimes would not recognise the receipt of gifts as a taxable event?

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By pauljohnston
12th Jul 2019 14:34

Supremetwo raises a valid point. Which is the same as that for Corporation Tax, the lower the rate the greater the amount of tax collected through PAYE etc.

And the more people that bring their money to the UK will benefit the UK .

IHT is the most hated tax according to research and I for one feel that if it is necessary that it start at £15M. Personally I would scrap it.

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