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MEMBER FEATURE: Inheritance tax - RIP? By Dan Martin

25th Aug 2006
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Following a week of debate over the future of UK inheritance tax, Dan Martin asks AccountingWEB members for their views on whether the levy should be abolished.

A few years ago you couldn't keep former transport secretary Stephen Byers off the front pages of national newspapers and out of the television news headlines. But since he stepped down from the front benches in May 2002 following several controversies including his support for spin doctor Jo Moore after she sent the infamous "a good day to bury bad news" e-mail, the MP for North Tyneside has been very quiet. But earlier this week, Byers was back and again it was for controversial reasons.

Writing in a Sunday newspaper, he called for inheritance tax (IHT) to be scrapped. Hitting out at the 40% levy on residences worth over £285,000, he said IHT is "a penalty on hard work, thrift and enterprise". Calling it a "tax on death", Byers said it was originally only meant to apply to the very wealthy and scrapping it would send a "powerful message" to middle-class voters.

The comments by the close ally of Tony Blair provoked angry response from the Treasury. Trade and industry secretary Alistair Darling, said to be a strong member of the 'Gordon Brown camp', claimed Byers was headline grabbing and that only 6% of estates were affected by IHT.

Whether or not Byers made the comments for political reasons is not really the main issue. They provoked major debate over the future of IHT and whether it should be scrapped completely or at least reformed.

Several organisations joined in the discussion during the week including the Association of Chartered Certified Accountants (ACCA) which called for a deceased person's main residence to be exempt from IHT. George Osborne, Tory shadow chancellor, backed ACCA's suggestion adding that his party was also looking into increasing the threshold and cutting the rate. He ruled out total abolition however.

AccountingWEB questioned members for their views on IHT and found them to be overwhelming opposed to the current system with the vast majority backing at least some sort of reform.


Several members backed Stephen Byers' ideas - management consultant Maurice Stafford among them. "I have never seen the logic in what is now IHT; it seems to be based largely on the politics of envy," he said. "Exemption of main residences would only be an attack on symptom, not the main problem."

A contributor going under the name 'TP' also questioned the existence of IHT. "I've often wondered other than a "need" to generate tax revenue, what is the justification for death taxes? What arguments have governments of this and other countries used for introducing such taxes?," he said. "Would some form of CGT on certain assets on death be an alternative? Some will say that this is IHT dressed up as CGT, but there wouldn't be a tax on cash like there is now under IHT."

Marketing manager Angela Walker came out as another Byers supporter. "I don't see why anyone should be penalised for inheriting assets which have probably already been taxed in numerous ways already," she said. "Call them what you like but they are devious ways of taking money from people who are probably not going to benefit from them through society as a whole."

Fellow member Mike Bassy was vocal in his opposition to IHT referring to it as "evil". "It takes a fundamental human desire to look after our children and turns it into a punishable offence," he said. "By taxing already taxed assets which represent a lifetime's labour, it treats us all as no better than battery hens, working for no gain and for no one but the state."

Also calling for the scrapping of IHT was Peter Tyrie, managing director of Essex-based garden furniture manufacturer Barlow Tyrie. "Am I missing something?", he asked. "Could someone explain to me the logic in exempting the value of a residence from an estate? Why should the beneficiaries of an estate comprised of a modest home and some shares pay more tax than that paid by the beneficiaries of a same value estate comprised of just a more valuable home?"

Tyrie added that scrapping of the tax was likely to
"attract people to this country who are wealth creators or have wealth and who would pay other taxes". He said was therefore a "very good case" to abolish it. "Will any political leaders - apologies to Stephen Byers - have the courage to promote this policy?," he concluded.


A significant number of members agreed that reform of the IHT system was needed but forecast negative consequences should it be scrapped completely.

Ken Solomons said: "The danger in a call for complete abolition is that the government might want to plug the gap in revenues with an annual wealth tax."

Fellow member Charlie Higginson added: "By scrapping it, lower income families will be further disadvantaged and the gap between rich and poor will get bigger and bigger generation by generation. Sure, increase the nil band, but don't scrap it."

Essex-based solicitor Bruce Hogarth-Jones, perhaps flippantly, claimed that a small but important group of people would suffer as the result of IHT abolition. "I think Stephen Byer's suggestion would cause unwarranted hardship to a small, but important and valued section of the community, namely IHT advisers," he said.

Primary residence exemption

Other members we questioned came out on in support of the likes of ACCA and the Tories in their call to exempt primary residences from IHT.

Perry King drew on personal experience when justifying his demands for reform. "My wife and I face selling our house to avoid this tax and we have few other assets," he said. "I think the idea of making the main residence exempt would be fair and eliminate most medium income and medium wealth families."

"I am not averse to some tax on inheritance but 40% over £285,000 is not fair to the middle class of the UK. The very poor do not pay it and the very rich pay someone so that the can avoid it. It's not a fair tax."

Pembrokeshire based chartered accountant Jane Heard also supported exempting the main residence saying it would be "particularly helpful where [houses are] left to two siblings, for example, and one wishes to live in the old family home but has to sell it in order to pay the inheritance tax bill".

Financial controller Anthony Finegan was another supporter but he said all other properties should be taxed as it's "fair to assume they are there for personal gain over the long term". In agreement was Peter Green who said "ACCA and the Conservative Party are correct to call for the reformation of the inheritance tax regime." "It would obviously seem much more equitable to allow individual's main residences to be exempt from the tax in much the same way as primary residences are exempt from capital gains tax."

Other ideas

Some members we questioned came up with ideas for reform of IHT other than the main residence exemption proposals.

Colin Wray warned that also excluding a deceased person's main property appears to cure the problem, it "would in reality lead to massive distortion at the top of the housing market as people strove to bury more and more of their capital in the family home". As an alternative he suggested: "Perhaps there could be a cap on the exclusion based on the proportion of net wealth represented by the house at death."

Neil Wilson, director at Yorkshire based Aldur Systems, said: "Unfortunately IHT planning requires that you give away all your assets and throw yourself at the mercy of your children. That removes control of the older generation and I don't see that as helpful." For him the solution is "charging people for owning non-income producing assets other than their primary residence ' essentially tax them as though they were getting rent on the things unless they are getting rent".

"That should stop empty houses and works of art gathering dust in basements and force them into the productive economy. I much prefer something like that than the annual wealth tax favoured in some other European countries," he added.

'Son of Grumpygit' meanwhile called for policymakers to look into adopting something similar to the Irish IHT system. "[It] taxes not the estate of the deceased, but the heirs on their cumulative inheritances, with the level of tax being a function of the relationship between the heir and testator," he said.

The future

Ultimately, it is unlikely that inheritance tax will be completely dead and buried in the near future. Commentators say this is particularly unlikely if, as predicted, Gordon Brown becomes the next prime minister. But as reflected in the views of AccountingWEB members, there is a groundswell of opinion calling for reform of the system. With house prices continuing to rise bringing an increasing number of people into the inheritance tax regime, it is likely that politicians will be forced to take action. Whether that action involves excluding primary residences, highering the threshold, cutting the tax rate or any of the other ideas put forward remains to be seen.

Inheritance tax ' predictions for the future

Earlier this week, Halifax published the following projections about inheritance tax.

  • In 2005/06 the government collected £3.3bn in inheritance tax revenue and projects £3.6bn in revenue this financial year (2006/07). Over the past five years there has been a 49% increase in IHT revenue.
  • IHT revenue was a record £1.7bn in first half of 2006, up £200m or 13% from the first half of 2005. The amount of IHT revenue collected in the first half of 2006 matches total IHT revenue collected over the full financial year 1997/98, only eight years ago.
  • Halifax calculates that the 2006/07 IHT threshold of £285,000 would now be £430,000 if it had been increased in line with house price inflation over the past ten years. House prices have risen by 179% in the past ten years, compared with just an 85% increase in the IHT threshold. At present the inheritance tax threshold is projected to rise very gradually to £325,000 by 2009/10.
  • The number of estates paying IHT rose by 72% over the five years to 2003/04 to 30,451. The government's own estimates suggest a further 22% increase in the number of estates paying the tax by the end of 2006/07 to 37,000.
  • Halifax estimates that the number of properties in the UK valued at more than the 2006/07 IHT threshold of £285,000 now stands at 1.5 million, or 8% of all owner-occupied properties. Halifax projects this will nearly triple to 4.2 million properties by 2020 if the threshold is only increased in line with retail price inflation.
  • Halifax projects that the revenue collected by the Exchequer from IHT could rise to £5.5 billion a year in today's money by 2020. That is a 244% increase from the £1.6bn the Exchequer received in 1996/97, the last time the IHT threshold was raised significantly.
  • Halifax calculates that the 2006/07 IHT threshold of £285,000 would now be £430,000 if it had been increased in line with house price inflation over the past ten years. House prices have risen by 179% in the past ten years, compared with just an 85% increase in the IHT threshold. At present the inheritance tax threshold is projected to rise very gradually to £325,000 by 2009/10.

Replies (18)

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By tomtrainer
30th Aug 2006 11:16

IHT should be 100%
Why should one person have an advantage over another, just because their parents were richer?

Aren't we all supposed to be born equal?

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By AnonymousUser
31st Aug 2006 08:46

IHT should be 0%

Tom Trainer is right. We are all born equal - ie with equal rights.

That does not mean we are all born with an equal (or,indeed, any) right to inherit our parents' wealth.

But it does mean all our parents are born with an equal right to leave whatever wealth they create during their life to whoever they want.

IHT robs them of that right. It is effectively legalised theft.

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By dan06
25th Aug 2006 09:52

Key facts
Duncan, you make a fair point. I took the title from the original Halifax press release. I have now changed it.

Dan Martin
Business Editor

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By AnonymousUser
25th Aug 2006 09:42

since when have "projections" and "estimates" been "key facts"?

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By AnonymousUser
25th Aug 2006 10:16

cheers Dan
I'm always wary of press releases - especially from building societies and banks!!

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By NeilW
26th Aug 2006 08:11

Taxation not the only issue
A tax that involves taking every second child and selling it into slavery is "easy to assess the correct liability, hard to avoid, is payable by those that can afford it".

But it doesn't make it right.


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By User deleted
25th Aug 2006 10:21

A simple reform of Inheritance Tax
The problem is that far too many estates are caught due to rising house prices. So the threshold should be increased to, say, £500,000 and thereafter indexed annually in line with house prices.

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By AnonymousUser
25th Aug 2006 15:42

hold on though, doesnt 100% BPR rescue many small businessmen from the spectre of IHT?

theres also lifetime giving, ie the PET regime which frankly is a terrific tax break.

Why not gear up on a house and give away the cash?

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By bobdoney
25th Aug 2006 11:28

Viva Espana
Being completely ignorant of these matters won't deter me from chipping in. Presumably people who retire to Spain or Bulgaria won't be liable for this tax. So who will left to pay it?

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By User deleted
25th Aug 2006 14:36

Another tax as unpopular as the Poll Tax
The Community Charge, cleverly marketed by the then Government opposition and media was largely accountable for the downfall of Margaret Thatcher. Perhaps Inheritance Tax will be the downfall of our present over legisaltive Government or at least knock some sense in to them to reduce the many burdens that have been imposed on small businesses and our endeavours at wealth creation - I for one are very quickly becoming very apathetic on several fronts - employing people, saving for a pension, personal security, health and bureaucracy, to name but a few. It would appear that no matter how much money our Government can extort from us by whatever means, they seem intent on squandering the proceeds (just look at the health service) - surely after earning it, paying tax on it, we should have the right to decide how to spend it, even when we are dead!

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By User deleted
25th Aug 2006 12:40

IHT is based on domicile
Not really, IHT is based on domicile and your properties overseas etc are all part of your estate unless you severe you ties with the UK and become non docimile. But of course, if your property is in Russia and non of your heir is in UK, as to how UK IHT law can be enforced is another matter.

I am not complete against IHT as long as the threshold is high (about £100m) and so that allow people to 'look after their heirs' and yet not to create ultra huge dynastic families where new comers cannot compete with them. Ironically, current IHT tax those who are not really that wealtyh while leaving those who are ultra wealth alone..

Oh no, you do not necessarily need to give everything away and be in the mercy of your children, you just need good lawyers and tax advisor and plety of cash to set up those stuffs..

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By orlando sargent
25th Aug 2006 12:21

Abolish PPR
Set IHT limit at £1m (surely reasonable), abolish ppr and introduce rollover relief on residential properties previously qualifying for ppr (tax take maintained as wealthy exit the housing market). It's got to be better.

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By markfaherty
25th Aug 2006 12:41

Inheritance tax is flawed, it even is incorrectly named; it is not a tax on inheritance but a duty on the deceased or lifetime transferor.

It is high time this unfair and complex tax was reformed and a model which in my opinion could be used is the Irish Capital Transfer Tax system. This is a true tax on Inheritance as the tax is charged on the donee who has lifetime exemptions, the amount of which depends upon his/her relationship with the donor. Currently transfers between spouses are exempt. Lifetime transfers from each parent are exempt up to €478,155, from siblings, uncles/aunts, grandparents and children €47,815 and from any other person €23,908. Please note that the value of the gift is after indexation.

There would also need to be some reforming of the UK Capital Gains Tax tretament on gifts but that in my opinion also needs a good shake up.

I am not advocating that the same rates should be used in the UK but the principle is much fairer and simpler.

Any comments?

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By User deleted
30th Aug 2006 18:02

Abolish IHT
Tom, I'm afraid we are not all equal...sorry to let you down.

Obvioulsy your soicalist views are based on evny and this is what IHT is all about.

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By AnonymousUser
25th Aug 2006 14:04

Tax on the dead or the bereaved!
IHT is levied on estates because the taxpayer is dead and cannot complain. Those who inherit the estate after tax will be glad just to get some money/assets and will perhaps feel that the tax was paid by the deceased.

Taxes are generally levied where there is no negative impact on the government levying the tax. If inheritence tax is abolished it would be replaced by an annual tax on wealth because it loses the least votes! The wealthy may not vote labour anyway!

The tax system is generally complicated and unfair (sometimes) I think the whole tax system should be re-designed.

Perhaps all persons living in the country should account for where their income comes from. If you seek out the long term benefit scroungers, the ghosts who work and pay no tax the tax raised or benefits saved may replace the inheritence tax lost.

Alistair Postle

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By skeeve
28th Aug 2006 07:35

Not fair but ...
Nobody likes taxes but given the choice, would we rather pay taxes out of our ongoing incomes, or pay tax on (essentially) gifts from our relatives ?

I don't doubt that this is a particularly nasty and pernicious tax, but it is much better than some of the proposed replacement taxes.

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By User deleted
29th Aug 2006 13:37

Not hard to avoid
William Saddleton said.. "hard to avoid..",

Not really hard to avoid provided you have enough money to get a good trust lawyer and have sufficient expense to setup the appropriate structure. Some foreign jurisdiction simply does not regconise fiscal claims and holding asset in island with no diplomatic relationship with UK with do the job. Otherwise, Switzerland will ignore corporation on tax related claim also.

Alistair Postle said: "Those who inherit the estate after tax will be glad just to get some money/assets and will perhaps feel that the tax was paid by the deceased."

This is not always the case Alistair. If one is given 100k by his/her parent to get onto the properly ladder and then the parent (donor) dies within 7 years (particular severe if within 3 years), the chap will be in nasty surprises and will potential have to sell his house !!

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By kjevans
29th Aug 2006 13:35

Making IHT feel fairer
Having just paid a horrendous(and totally unexpected)sum on the deaths of my parents, I found that some aspects of IHT felt really unfair, so changing them might help without substantially reducing the tax take.

1. Why must IHT be paid *before* you inherit the estate - it really hurts to pay tax with a huge loan you've also paid interest on.

2. My parents very kindly helped me to buy a second-hand carout of their taxed income as part of a birthday present. Then they were daft enough to die only a couple of years later. Paying IHT on your birthday presents definitely feels unfair.

3. Why, if you accidentally underestimate the value of the property of the deceased do you have to pay extra IHT, but if you OVER estimate, you don't get a refund?

4. Why can't you set the (huge) solictor's bills incurred by the estate against the IHT?

It's bad enough losing a family member without all this.

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