Calls for overhaul of inheritance tax system – how would it work?

Resolution Foundation proposes ‘lifetime
receipts tax’ allowing everyone an untaxed lump sum

In Depth

The Resolution Foundation is calling for a new tax that “would
raise more for the state and would encourage families to pass their
wealth to younger members”, says The Times.

The proposal, outlined in a new report, is part of a campaign led by the
think tank’s chairman, former Conservative minister Lord Willetts,
aimed at tackling intergenerational inequality.

Chancellor Philip Hammond has ordered a separate review of
inheritance tax (IHT), to be conducted by the Office of Tax
Simplification, an independent arm of the Treasury. “The scope of
the exercise suggests that while some loopholes might be
eliminated, it is unlikely to lead to significant reform,” says
the Financial Times.

But, as the newspaper notes, there are “growing calls among
left-of-centre politicians, both in the UK and internationally, to
use wealth taxes to create a fairer society”.

What is the current situation?

At the moment, most married couples can leave up to
£850,000 to their direct descendants tax free. The tax
is only levied on about 4% of estates, and raises just 77p of every
£100 of taxation.

“It is Britain’s most hated tax, yet hardly anyone pays it,”
says The Guardian. 

A 2015 opinion poll by YouGov found that 59% of respondents
opposed it, while a report by the Fabian Society said that people from
across the political spectrum “disliked the levy because it was
imposed at a time of grief on money on which the deceased had
already paid tax”.

Among people’s gripes are that soaring property prices in the UK
“have dragged more estates into the IHT net”, adds the FT.

Economic analyst Adam Corlett, author of the Resolution
Foundation author, said: “Inheritances are already worth over
£100bn a year, and their doubling over the next 20 years means they
are going to play an even larger role in shaping British
society.

“But the current system of inheritance tax is not fit to deal
with this societal shift. It currently manages the uniquely bad
twin feat of being both wildly unpopular and raising very little
revenue.”

What is the Resolution Foundation proposing?

The think tank is calling for everyone to get a lifetime
allowance for the receipt of cash/asset gifts: it suggests
£125,000. Anything received beyond that would be then be taxed in
bands – 20p in the pound up to £500,000, and 30p after that.

According to the report, the new tax would deter avoidance and
raise an estimated £11bn a year in 2021, compared with £6bn under
the present system.

One aim is to “push money through to millennials earlier, many
of whom are priced out of the housing market and will not inherit
anything until they are 61, on average”, says The Times. By that
age, the windfall has arrived “far too late to help with buying a
home or bringing up children”, the report argues.

Supporting the recommendation, MoneyWeek editor Merryn Somerset Webb
said: “It takes the strain from the old (they can’t avoid it); it
encourages a wider spread of wealth (the more people you leave your
cash to the less tax is paid); and it’s not too tough (the marginal
rate stays lower than it is now)”.