Another day, another call for inheritance tax (IHT) to be scrapped. It is supposedly the most hated tax but, in fact, more than 93% of estates are expected to pay none at all. This may be because they fall under the threshold, which can be up to £1 million in certain cases where a family home is involved and passes to children or grandchildren. Alternatively, a relief may apply, such as that in favour of spouses and civil partners, or for business or agricultural property.
Despite this, there is something about the idea of taxing a parent's property on their death that people consider unfair, even if they are not part of the 7% likely to be affected themselves. For many people, it is more likely to be the cost of nursing and retirement homes, rather than IHT, that will eat into a family inheritance.
For the wealthy, however, IHT is a real issue and, as the Conservative Growth Group (CGG) of 55 MPs, including former Chancellor Nadhim Zahawi, identifies, those who wish to avoid it may make investment and other decisions to mitigate IHT rather than maximise investment return. The CGG argues that, as well as being "morally wrong to take someone's assets on their death", decisions people make to mitigate IHT may have distortive implications for the economy and the individual's personal finances.
The CGG also points out the long term argument against IHT, which is that it is effectively a double tax. People may have paid income tax on their earnings, or capital gains tax on their investment gains, and that is taxed again on death. However, there is, of course, the counter argument that IHT may not feel entirely fair, but neither is a very small number of people inheriting large amounts of untaxed cash. Much of what is taxed on death is attributable to the rise in property prices rather than earnings over the years. The Resolution Foundation estimates that the majority of those who would benefit from the abolition of IHT would be the wealthy, half of whom live in London and the South East.
What is not addressed in the article below, but may be in the paper due to be published by the CGG this month, is what the group is proposing as an alternative to IHT in order to replace the annual £7 billion tax that IHT currently raises.
A CGT charge on death might be a more palatable alternative, especially as it taxes only the increase in value of property since acquisition, rather than its entire value. However, while CGT rates are lower (at a maximum of 28% for land and 20% for other assets, as opposed to 40% for IHT), the threshold for taxation is also much lower. Furthermore, with an annual allowance that has just been reduced to £6,000 for individuals, and will be halved again from April 2024, potentially more families would be paying CGT on death than are currently paying IHT. This would be balanced to some extent by the fact that only the gain in value of assets is taxed and at roughly half the rate of IHT, and that cash is not taxable (other than foreign currency gains). Also, for smaller estates, it might be possible to provide targeted reliefs and exemptions, so that those who would not suffer IHT under the existing law would also not be penalised by such a change.
The idea of replacing IHT with CGT on death is not a new one. However, it would have a number of potential advantages, not least removing the element of double taxation that exists with IHT. The lower rates may make its avoidance less of an imperative than is the case with IHT, even for the wealthy, and may encourage a less tax-focused approach to investment, with consequent benefits to the economy.
In any event, while it will be interesting to read the CGG's paper when it is published, realistically, it is unlikely that the government will choose to scrap IHT in the immediate future. They may, however, choose to simplify and streamline some of the reliefs and exemptions, as has been proposed in the past, which would be welcomed and bring benefits for both bereaved families, and the Treasury.