What's the problem with Inheritance Tax?

[QuickBrown]

Inheritance tax seems to be really unpopular among certain sections of society. Obviously people always object to any taxes, but it seems to me to be the absolute least worst tax, as the dead have no use for money.

Those who object to it or know others who do, can you explain a few things to me? Firstly is the the idea of your estate being taxed once you are dead that you object to? Or is it that you are due to inherit and this will reduce their estate? Or something else?
Also where do you stand politically on other inheritance, for example are you pro-aristicracy and inherited titles?
If you are worried about your own estate being reduced before your children get it, are you someone who has given a lot to your children financially in their adult years or do you expect them to make their own way in life?
Also if you have inherited significant sums, has this swayed your thinking?
I feel a bit out of step with other people's thinking here!

Statistically those people are likely to be very elderly and to have bought their property a long time ago is what I said.

I'm sorry for your circumstances.

@falsespring has to pay rent at market rate to the owners of the house and keep records of that.

A scenario which feels unfair, is that my grandmother left her house and land (value c. £2m to my father and his siblings). As she lived to almost 100, and it is unlikely my father will live that long, it is highly likely that the same money will end up being subject to inheritance tax twice in a few short years.

I have no problem with inheritance tax in principle - what I have a problem with is that it is largely borne by the upper-end of ‘mass affluent’ estates. Those with more can afford to put in place estate planning which can largely avoid the tax. Those with less fall below the thresholds, and those in the middle end up paying the majority of the tax - either because of lack of tax savvy-ness or because of poor planning.

That surely is not a good design of a tax.

The money has been taxed already as it was earned. (Income tax or capital gains tax for example) I think this is one reason people object. (There is a big chunk tax free though)

Many people really need what is passed on.

But those are estates with no direct descendants so who is impacted? Nieces and nephews or grand nieces and nephews? Siblings? Parents? The dogs home? Nobody who is financially dependent on that person anyway. I'm sure if I received a share of my unmarried uncle's £500K estate I could cope with the tax person claiming 10% of that.

Paid tax, saved and worked hard why pay more?

I doubt that most beneficiaries are financially dependent on the deceased.
imo it’s unfair: either give all estates the nil rate residence banding or none.
my DM’s estate was over £750k - no tax to pay and beneficiaries not financially dependent on her.
£500k estate with no direct descendants, tax to pay £70k.
Clearly any inheritance is a windfall regardless of tax due, but allowances should be applied equally imo.

I agree with this. I also think if you jointly own a home as your residence, then it shouldn’t matter if you’re married.

Isn't the 'unused pension pots now being taxed if included in inheritance, it's unfair' partly offset by the fact that pension contributions are taken before tax? That pot has been built up by money on which the contributor did not pay tax, often on the basis of advice to build the pot and thus avoid (quite legally) moving across a tax threshold or retain an entire bonus payment. The pension would be taxed on drawdown. Pensions are designed to help the person live well beyond their working life, rather than add to the inheritance for the next generation, and the tax breaks are the incentive to make provision for your own future!

As I said upthread, it is possible to shelter your beneficiaries from having to find big cash sums to pay an IHT liability, possibly in time of crisis and grief, by taking out a whole of life insurance policy and building up a pot which, if written into trust, sits outside the value of the estate for tax purposes. This gets paid out before probate is granted, and allows the beneficiaries to pay any liability quickly, without having to incur interest or sell property off quickly.

These products used to be quite niche, but there has been a big upsurge in interest since the new rules on pension pots. (I am not a insurance broker or financial advisor, btw, just a punter trying to make sensible provision for myself and family, while playing fair.) I would be interested to hear if anyone has had any practical experience of actually cashing one in and and paying it out in a timely way. On the face of, they look like a very neat, cost-effective way of organising provision for significant expenses, like IHT, post-death, which meets individual, family and social needs. I pay the taxes due on my death, if I"m wealthy enough to have more than £1m to leave, but I"ve made provision for them during my lifetime.

I wanted to give you a Thanks icon for the post above, @BigSkies2022 , but for some reason I can’t. So I will say a public thanks for this balanced and thought provoking post.

Whether I agree with the existence of trusts is a different question, but you and everyone else using them are playing by the rules and that is the bottom line. It would not be right to criticise you.

(The suspicion that certain rules were made so that vast estates could be preserved without the need to sacrifice 40% to IHT is a different question, but it is one for the government to answer and it is hardly unique to the UK.)

You wouldn’t be paying more

Agree

Whilst currently legal
The Govn really do need to crack down on IHT avoidance tactics
A sweeping cull is needed

I am not using a trust in the way some people do- these strike me as expensive and complicated things needing lawyers and tax accountants. I took advice, 15 years ago, from a tax accountant and took out a whole of life policy, written into trust. We pay into it each month (from taxed income, obvs) and it’s currently around £20 a month - started out at around £10. We will pay it for the whole of our lives, and it generates an index- linked payout which can be used (if necessary) to pay any taxes due. If no taxes are due, then happy days! More cash! But I doubt that will be the case.

The problem with inheritance tax is that you work your whole life, pay income tax, National Insurance, VAT, council tax and countless other taxes along the way. You save what’s left because you’d like to leave something to your children, and then when you die the government can tax part of it again. To me, that just feels like taxing the same wealth twice.

I know people will argue it’s there to reduce inequality and fund public services, and I understand that viewpoint. I just don’t think parents who’ve worked hard and paid taxes all their lives should be penalised for wanting to leave something to their children. Surely that should be their choice. My FIL recently passed away - 40% of ‘his estate’ was then given to the government, he came from nothing and built a successful company, he was in no way a multi-millionaire, it felt so wrong that it couldn’t be passed onto his grandchildren rather than the government considering he paid tax all his life.

Agree in part but £1,000,000 ( assuming a couple ) wouldn’t have been taxed
and family got 60% of everything over that

Nevertheless I agree it should be lower

Agree. The whole of life policy put into the trust from the outset can be done without lawyers and tax advisors. You can simply use the insurance company's standard forms.

It is available to everyone, not just for the wealthy with the money to hire advisors.

I will look into the whole of life aspect, thank you. Silly question, but can insurance payout be taxed too?

There’s also a misconception about estates liable for IHT. 70% of estates that HMRC collect tax from fall under the £1m threshold.

This.

Caveat - I am not a tax lawyer so could be wrong.

If the whole of life policy is written into trust from the outset, the payout on death does not attract IHT because it falls outside the estate. The payout does not attract income tax because it is not income. I don't believe it attracts capital gains tax either.

The tax rules may be different if the policy is surrendered during the life of the insured, assuming it has a cash value.

Also not a tax lawyer but I think the idea is it is written into trust whereby the trustees determine who it goes to, and whilst they should follow your wishes, you haven’t personally gifted the money as it is at the discretion of the trustees.

They're dead. They don't pay the tax. The beneficiaries who haven't paid tax, saved or worked hard to amass the legacy pay the tax.

@blueshoes@user593thank you

This.
I didn't earn the money on my DM's estate, she did.

Do you think it should be paid on all estates no matter the size/value?