This year’s Budget will be on 6 March. If you believe the rumours, the reason for an earlier Budget this year is that chancellor Jeremy Hunt wants to clear the decks in preparation for an earlier general election.
As part of that, he hopes to be able to garner votes by adding a few populist tax giveaways to a jaded electorate who might otherwise turf the Tories out of office.
And what better way of Hunt winning over voters than bravely ditching inheritance tax (IHT), something described as “the most reviled of taxes” in a recent Sunday newspaper column.
The notion IHT is unfair as it is a ‘tax on those who have been financially responsible throughout their lives’ is intriguing
Reports suggest the chancellor is considering a cut in the top rate of IHT from 40% to 30% – or possibly even 20% – while also raising current tax-free thresholds. But this isn’t enough to satisfy the column’s author Jeff Prestridge:
“More conservative than Conservative, more pussyfooting than boldness and, frankly, profoundly disappointing. Wet politics which even the late Geoffrey Howe would disapprove of.”
Given that, as chancellor between 1979 and 1983, Howe was happy to levy capital transfer taxes (the forerunner of IHT) on assets above the equivalent of £217,500 in today’s money, this seems a bit of a stretch.
More intriguing is the notion IHT is unfair because it is a “tax on those who have been financially responsible throughout their lives and put money aside for the future”.
As for the idea this money is essential to ensure young people get their foot on the housing ladder, who are we kidding?
No it isn’t. Like the Norwegian Blue parrot in the Money Python sketch, they’re dead. They are bereft of life. They have ceased to be and no longer pay tax by definition. Any tax is paid on the estate by people whose own contribution to its accrual typically included the arduous duty of being part of the same gene pool as the person who died or being named by them in a will.
As for the notion this money is essential to ensure young people get their foot on the housing ladder, who are we kidding? According to the Institute for Fiscal Studies (IFS), if IHT were cut or abolished in 2024–25, 83% of the fiscal benefit – a cool £7bn a year as currently levied – would go to the wealthiest 5% in society. The top 1% of estates would gain £500,000 on average if the IHT rate were halved.
There would be no benefit at all to the more than 90% of individuals’ estates who would not pay IHT anyway because their wealth is below the tax-free threshold.
If the annual flow of non-spousal inheritances next year was equally shared across those aged 25, each would receive around £120,000
Moreover, again according to the IFS, “inheritances are most often received when people are in their late 50s or early 60s. Around the ages of 50–54, children of the wealthiest 20% of parents have an average of £830,000 in wealth, while children of the least wealthy fifth have on average £180,000.”
Calling for IHT to be abolished so well off 50- and 60-somethings can become even better off doesn’t have quite the same ring to it, does it?
All this talk of abolishing IHT takes place in the context of a complete collapse in younger people’s access to decent housing, whether rented or owned. In 2017, according to a different IFS report last year, just 35% of 25- to 34-year-olds were homeowners, compared with 55% only 20 years before. In 2022, just 10% of homeowners in England were aged under 35.
Let’s stop pretending the outright abolition of IHT is anything other than a goodbye present, making one last payout to those who least deserve it
Ironically, the IFS says, if the annual flow of non-spousal inheritances next year was equally shared across those aged 25, this would lead to each receiving around £120,000 – a huge leg-up to help buy their first home. Assuming this is really about leg-ups for young people.
Does that mean IHT should never be reformed? Not at all. Intriguingly, the IFS document lovingly quoted by the right-wing press has plenty of suggestions, including levying the tax based on the assets of the inheritor, not the estate itself.
Capping reliefs for agricultural and business assets, abolishing them for certain classes of shares or ending the exemption of pension pots from IHT are just some of the other ideas in the paper.
Let’s stop pretending the outright abolition of IHT is anything other than a goodbye present from an administration which knows it is done for and wants to make one last payout to those who least deserve it.
Nic Cicutti can be contacted at nic@inspiredmoney.co.uk
Nic, its your words ” Those whom least deserve it” as the vast majority of people in fact will pay no IHT, why should they, benefit from my working life’s efforts, when I wish simply to pass down to my own children, my estate, having paid my fair dues throughout my working life. After all, I expect I have paid far more income Tax than most!! employed more than some, and advised those who sought my advice, pay less!! Being single I only have a £500,000 allowance, my home is worth more than this!!
An objective and well reasoned article…
Coincidentally, I have been working on a private equity product which has, in certain circusmstances, an unplanned IHT benefit not business related.
One side show of the Labour promised non dom (crazy) proposals is the huge increase in IHT which could well result as current offshore stuff is brought into UK.
If there is to be tinkering with, rather than outright removal of IHT, more likely I would suggest, then the restrictions upon current reliefs, and the time factors too, will be the most likely changes.
Torys probably extending them, Labour likely reducing the benefits available. Clearly, removing IHT 100% to benefit 2-3% is not a vote winner except for those who vote Tory anyway.
What has to be very carfully considered is the effect of eliminating/reducing business reliefs, when the real point is the time they have been held. It is not farming’s fault trade returns are 2-4% gross, when a sale could keep them in superior confort – and, anyway, collecting coupon and dividend is a lot easier than 5am milking!!
Similarly, family businesses passed down. It is quite a curious anomaly that IHT avoidance product is openly marketed as such – (E.g. Octopus) – openly exploiting the 2 year business relief rule without HMRC peeping a (DOTAS) whistle! I believe this is not what Parliament intended!!
It is a brave adviser/investor who would put anything into this product predication at the moment – especially given the beyond usuary charges – better to gear up estate debt, then put proceeds beyond death.
As for basing tax take upon beneficiaries… I have lived in 3 other countries… I could live in a tropical climate for a tax year (less 15 days) to avoid 40% – this not advice… but a must!! 🙂
I am by no means a socialist, but abolishing IHT is an absolute nonsense. It will only benefit the very richest in our society and an impecunious government will have to raise the money elsewhere. From the less well-off perhaps? Currently a husband and wife can pass £1million free of IHT. This includes the £325k each and the Residence NRB. Yes, many in London with property will be caught, but 60% of the residue is better than a smack in the face. As the saying goes – ‘Be careful of what you wish for’. The alternatives might not be so appealing.
Spot on Nic
Personally, I believe the Conservative Party should go for a last roll of the dice and an all-out taxcutting budget daring Labour to challenge it and when they almost inevitably win the next general election reverse the cuts.
In other words, remove inheritance tax and capital gains tax from the tax lexicon and cut all rates of income tax across the board by 10% whilst increasing personal allowances for inflation over the last decade.
The temper tantrum that might happen from the markets can be no worse than the confected one after Liz Truss’s attempt at supply-side economics and cutting taxation.