Inheritance tax too high or too low?

g.taxman.brown

How would you consider a person that came into a lot of money by inheritance. Paid IHT. However, not used the money and passed it on to their offspring.

The offspring has not earnt this money - should s/he take this money or should they have to pay tax for receiving unearned income?

nemo183

g.taxman.brown wrote:

How would you consider a person that came into a lot of money by inheritance. Paid IHT. However, not used the money and passed it on to their offspring.

The offspring has not earnt this money - should s/he take this money or should they have to pay tax for receiving unearned income?

Mmmm. The acutal concept of IHT goes right back to around 1796. Without going in to all the history, most politicans from any party would agree that, on the whole, it's purpose was to extract tax from people that had become very, very wealthy.

Over the years, although it has gone through a number of name changes, the actual reason for it's existence has remained the same. Which is fine. We elect governments, who in turn make laws that they have to justify and then we have no choice but to follow them.

The main problem with this tax is that, even going back to it's roots in 1796, it has never really been effective. The obvious problem has been that whilst it was designed to "catch" the super-rich, these are the very people that can afford to find a way round it. During the course of the last fifty years some of the finest and best paid accountants in this country have been able to run a coach and horses through any new laws that have been passed to try and stop them. In many ways the government have been fighting both blindfold and with both arms tied together. In order to make these laws successful, they have neither had the talent and skills required to draft effective legislation, or staff of a calibre needed to deal with possible wrong-doers.

Despite these woeful failings, it turns out that mathematics has come to their aid. During the last ten years, house price inflation has increased at a rate four times faster than IHT allowances. So now, out of nowhere, they are able to collect around £4 billion, thanks to house price inflation.

Although the people that are paying this IHT are without doubt well off, they are by no means the people that the tax is aimed at.

And before anyone gets too smug, they should consider the following. The Inland Revenue have failed for years to collect this tax from the people it was aimed at, no matter how often they have closed each loop-hole. Because of house price inflation, money is now pouring in like water. Just how long do you think it will take before they "review" the whole basis of IHT, and decide to target it at anyone who dies and leaves a house worth more than they paid for it?

Lastly, you talk about money that hasn't had tax paid on it. Anybody leaving an estate today, of a reasonable age, has already paid tax. They've paid income tax on their savings (and don't forget that it's not so long ago this could have been at 98%). They have paid tax on any investments they may have made. If most of their money has been tied up in their house, and they have been prudent enough to have a few tens of thousands in savings, they will have been denied any means tested benefits. When they die, they pay IHT. Just exactly how much more tax do you think they should hand over?

Andy_Davies

ED wrote:

However, I'm not so sure raising the IHT threshold to half a million pounds would be "virtually the same as eliminating it". People with property above that value (including home, furniture, car, investments and savings) do exist in the

Aye, there are people living in the UK who are worth more than half a million pounds but they can afford people to do their tax planning for them - setup trusts etc. - so they can avoid IHT when they die.

ED

It's my experience many people are 'asset rich, cash poor' – especially those living for a decade or more in the same residence that happens now to be worth (with their other assets) above the threshold for Inheritance Tax. Many such people struggle to pay their Council Tax, heating, food & water bills, etc, from a meagre pension perhaps + share dividends (after tax!). Capital value of investments & savings accounts often need liquidating to afford to live.

After death, when their home is sold, maybe it sells for a figure in excess of IHT.

A person whose estate transpires to be worth more than half a million pounds could not necessarily have afforded to go down the avenue of crafty inheritance tax planning (trusts, etc).

Andy_Davies

ED wrote:

It's my experience many people are 'asset rich, cash poor' – especially those living for a decade or more in the same residence that happens now to be worth (with their other assets) above the threshold for Inheritance Tax. Many such people struggle to pay their Council Tax, heating, food & water bills, etc, from a meagre pension perhaps + share dividends (after tax!). Capital value of investments & savings accounts often need liquidating to afford to live.

After death, when their home is sold, maybe it sells for a figure in excess of IHT.

A person whose estate transpires to be worth more than half a million pounds could not necessarily have afforded to go down the avenue of crafty inheritance tax planning (trusts, etc).

I wish I could find the IFS stuff again because it proves that the majority of estates that pay IHT are worth less than half a million pounds.

As for people who are asset rich/cash poor why are they a special case?

If I've not got enough income to live on I've got several choices - find some more income (easier said than done), reduce my costs or liquidate some assets (not that I've got a lot left anymore)

Why should retired people be any different?

ED

Council Tax, utility bills, etc, have risen disproportionately for people resident in the same property for 15, 20, even 50 years (I know many in the SE of England). They live quite frugal lives – even though the house or flat is of high value. They are asset rich, cash poor.

To sell their home would devastate many. It may also reduce them to a 1-bed property, so no space to accommodate a visiting relative or friend.

Not all elderly people have an option to "find some more income" (paid employment, etc).

beaz

I agree with some of your members. I suppose we will have to have some sort of inheritance tax, if so, I would like the nil rate band be increased to say, £500,000 and then linked to house price indexes. Some hope!!!

nemo183

Andy_Davies wrote:

I wish I could find the IFS stuff again because it proves that the majority of estates that pay IHT are worth less than half a million pounds.

This is true. But it's worth looking behind the meaning of these figures. Whilst the majority of IHT may be collected from estates worth under £500,000, you'll find it jolly hard to find a figure that tells us where no IHT at all has been collected from estates over this amount. As the value of an estate rises, the amount collected as IHT falls until most of the largest estates pay nothing because they can fund the very best avoidance measures.

So, the end result is that a tax that was originally brought in in 1796 in order to tax the very, very wealthy is now extracted from the quite well off, in the form of a stealth tax, brought about by keeping the IHT threshold rate well below the rate of house price inflation.

It is a sad fact that the Inland Revenue lack the ability to enforce the collection of IHT from wealthy estates because 1) They lack the skills to draft the correct legislation, and 2) The calibre of their staff falls so far below the calibre of those employed to exploit the very loop holes they have left open.

SMarg

I have to agreed with ED - I am one of those people who are 'asset rich' and 'cash poor'.

I have sacrificed and gone without all my life to have a property and "security", have always been debt free, never taken anything from the state as I have always worked. As I am (now) a single parent life is not easy but I retain my house for my pension and I would like to pass it on to my daughter as I have worked hard to keep it. If the inheritance tax continues after the next election I will have to re-think what I will do.

My property is bordering on the £500,000 mark as I live in the South East. Yes, I have benefited by buying well a long time ago and being fortunate to live in a nice area where property prices are now high but that has also come at a high price to me.

Rather than lose the property in the event of my death, which would happen if my daughter had to pay the inheritance tax, I would have to consider selling and downsizing and spending my money as I am not in the salary bracket to employ an advisor to get me out of this situation.

This is an unfair tax as has been said before. If I lived in a council house, and contributed nothing then I would not be penalised, but there are plenty of people well able to purchase a house who still remain in council housing who will not be penalised and also not have to pay for their care homes when they are older as they don't have the "assets(!)" that we have.

digitaltoast

Just one point: We NEED to start calling taxes what they really are:
National Insurance has NOTHING to do with the National Health Service, it's a tax, pure and simple.
Stamp Duty has nothing to do with stamps, it's a tax.
I bet if "inheritance tax" was called "Dying Tax" or "Death Tax", there'd be more fuss. That's all it is. You live to work, you pay about 70% tax throughout your life (as a lower rate tax payer) and when you die, you get smacked for another 40%.

(While I'm here, I've FINALLY got the written answer from the council - council tax is NOT a charge for services such as bins and roads! It's a tax, pure and simple. Now I can enter round 2!)

(Edited for typo)