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Government Urged to Replace Inheritance Tax

A newly published report from think-tank the Resolution Foundation has called for inheritance tax (IHT) to be abolished and replaced with a new system that is fairer to families and harder to avoid. 

Record Levels of Wealth to be Passed On

The report, which was produced for the Intergeneration Commission, notes that inheritances have doubled over the last 20 years – hitting over £100bn in 2015/16 – and are forecast to double again over the next two decades as Britain’s record levels of wealth are passed on through families.

However, while the increase will undoubtedly bring windfalls for many millennials, the Foundation warns that these inheritances won’t help tackle the big economic challenges facing families or the country.

According to the Foundation, inherited wealth won’t help many families at a time when it could be most beneficial. This is because the most common age at which the current millennial generation are expected to inherit is 61 – far too late to help with buying a home or bringing up children.

For the state, IHT does a poor job of collecting revenue. It accounts for just 77p of every £100 raised nationally, and just 4% of estates are currently subject to it.

The Foundation also states the IHT is out of touch with modern Britain and is also seen as an unfair tax. This unpopularity is due in part to it being perceived as a tax on the dead, having a high marginal rate of 40%, and because it is often seen as merely a voluntary tax for the very rich and well advised.

Lifetime Receipts Tax

The report therefore calls on the Government to address these issues by scrapping IHT and replacing it with a new Lifetime Receipts Tax, with a much lower rate.

This would involve taxing those benefiting from any inheritances instead of the deceased’s estate – but only for any inheritances beyond a lifetime allowance. This would have the added benefit of encouraging families to spread their wealth, as each beneficiary would have their own tax allowance.

According to the Foundation, this new approach would significantly reduce the scope for the very rich to reduce their tax bills by making large gifts well before passing away, something ordinary families whose assets are largely tied up in a house are unable to do.

The report suggests that an allowance of £125,000 should be applied to a Lifetime Receipts Tax, followed by a 20p rate up to £500,000 and 30p after that. It claims this would reduce the marginal rate of tax on wealth transfers significantly while still raising up to £11bn in 2020-21 (compared to the £6bn that the current system is projected to raise).

Review by Office of Tax Simplication

The Government is aware that the current IHT system is in need of review, and recently commissioned the Office of Tax Simplification (OTS) to carry out a review of a range of aspects of IHT and how it functions today to identify simplification opportunities.

As part of the review, the OTS has published a call for evidence and an on-line survey to gather information about people’s experience and perceptions of IHT.

It is inviting comments from all those with an interest, including individuals with personal experience of having to go through the process of establishing, when a relative has died or as the executor of a will, whether there is a liability for Inheritance Tax.

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