Abolish IHT entirely but replace it with gift tax

[Laptopfangirl]

Inheritance Tax in the news again today after the Tories pledge to exempt family homes..

It's always such an unpopular tax, and I get why - it does seem unfair to pay a tax on your assets when you die (even though, I know, most estates don't pay anything).

Of course the opposite argument is that it's unfair for the recipients of estates to get rich off the backs of their parents.

So I wonder if it would be unreasonable to abolish IHT and tax gift receipts instead. So instead of the estate paying tax if it's worth a certain level, the dead person can leave it all tax-free, and tax is only paid by recipient's if they receive a gift above a certain level of value.

That way the dead person pays no tax (which seems fairer) and also the lucky gift recipient does pay tax (which also seems fairer). If you set the tax level at the same marginal rate as income tax then if you split your estate so that nobody got more than £12,750, nobody would pay tax at all on their gifts. This might encourage proper redistribution of wealth.

Am I being silly? I'm sure there are many reasons why this wouldn't work, but I'd like to hear what they are so that I can stop thinking that this is a good idea!

'The very wealthiest' includes many many people of relatively modest means in the South East, parts of Cheshire, North Norfolk etc., it doesn't take much to go over the threshold, many older people who have lived in their house all their lives sometimes have little idea of their value. When a family member's husband died 30 years ago she was told by her solicitor to get spending or she would leave enough for IHT to kick in.

Probably the same place that the money will come from to prop up massive non working families by getting rid of the 2 child limit.

Totally agree, I found that the harder I worked, the richer I became. Never really understand why!

Only 5% ? If you own a house in SE England you're going to be well over the threshold.

You need to read up on how inheritance tax actually works. Due to all the other allowances a great number of people don't pay it on much higher amounts than the basic.

You can learn more on the gov website or moneysavingexpert will have something.

When a family member's husband died 30 years ago she was told by her solicitor to get spending or she would leave enough for IHT to kick in. Yes this is why people gift it early.

It's less than 5% of estates currently, anticipated to be 10% or so according to someone up thread.

10% is a small minority.

You are misunderstanding the psychology behind the moaning.

Some people want to be able to pass down their money to their family tax free because they are family. They see no reason why that money should be taxed. Family are not freeloaders getting something for nothing, they are family.

The right see the basic unit of society as the family.
The left see the basic unit of society as the individual.

So the right see paying tax on money you give to your children as fundamentally wrong.
The left see getting money for free and untaxed from you parents as fundamentally wrong.

I’m not sure going by these threads there seems to be plenty on the left who just pass it on before IHT kicks in.

I expect there are plenty of people of all political persuasions who give with warm hands.

All the other allowances? There is the 325,000. Then there is an extra 175,000 if you pass house on to direct family. There is the 1 million limit BUT only if you are a married or civil couple leaving each other everything . In my case my husband and I are not leaving anything to each other as we have children not of our marriage so I will not benefit from that. A single person will not either. I'm sure there are many people in this boat . I was travelling through this area last night. Look at the average house price there. That means that in my case the IHT applies to my saving and pension fund at 40%. People in Ewell are off to a bad start too compared say to Dundee. Unfair to people in different areas and of different status.

In my case my husband and I are not leaving anything to each other as we have children not of our marriage

We do too but we trust each other not to defraud the other’s children. There’s not much point in being married if you don’t.

Not really. IHT is technically not double taxation because it is legally levied on the deceased's estate, not the living person. However, the money within that estate was already taxed at a marginal rate when originally earned, or via CGT during your lifetime. While the inheritor only pays CGT on any new value gained after your death, there is no denying that the 40% IHT bill means the exact same generational pool of wealth is diminished by tax an additional time.

You have totally missed the point. I am not asking about the difference between IHT and gift tax, I am asking the difference between taxing gift recipients of the living and the dead. Children don't pay tax on money and benefits in kind that there parents give them which can amount to many 10s or even 100s of thousands in value. Based on your reckoning they should be paying tax on all of it. Along with birthday presents etc You then say large gifts but who decides what constitutes a large gift?

The profit derived from a house purchased decades previously as a main residence has never been taxed. My parents’ house, for example, was purchased for roughly £4k. I sold it after their deaths for £252k. That’s £248k right there that nobody had ever paid a penny of tax on.

None the less that money which bought the property was taxed on earning. Gains, inflation etc are complicating factors but don't change the principle. Could you buy another house for 4K? If you buy a house for 300K and sell for 600K but a new house is now 600k has your wealth increased? Every UK government until now has accepted that it has not.

So do you think the Private Residence Relief should be abolished? What is the actual point in building wealth if you are just building it for the state? IHT disincentivizes saving, and family preservation. It's absolutely wrong. The creation of wealth, generational wealth included, should be the main focus of both government, and the population.

I understand where you’re coming from and how the system works (I have a legal background and work in finance) but I just don’t see the necessity for change.
Yes the IHT that “I’ve” paid is effectively coming out of dad’s estate but if I inherited tax free then the presumably similar amount would be coming out of “my” estate.
At the moment I gift my £3000 allowance to my children and, if there’s time when probate is granted, I’ll either vire money directly to them by deed of variation or, if not then I’ll gift it and hope to survive for seven years. If I don’t then the tax from my gifts will be paid from my estate.
Meanwhile I’ll get some good planning in place for when I go.
I’m also unclear how a scheme taxing gifted funds could be organised?

You’re not buying another house. You’re converting a £248k profit into cash. My parents weren’t building wealth, they bought somewhere to live. By happy accident that property made a massive untaxed profit. That’s the case for most people.

I was happy to pay IHT on DMs estate. It was over the threshold due to the huge increase in her house's value (SE) not through her 'hard work'.

My much better off sisters grumbled about it though and tried to lie and hide assets from the solicitor/taxman. Both they and DM were all public sector workers but no connection between their wages and taxation was made in their greedy little minds.

Or maybe the fact that they had already spent their working life in public services meant they didn't want to hand over yet more money to the taxman. Maybe they felt the state already had their pound of flesh.

There is no wealth increase if the asset value is such that it cannot be replaced except for the same cash. Its a fundamental principle that every UK govt has recognised until now. You might have converted that house to cash but you have NOT made a profit if you can't replace the house for less cash. Your wealth has not increased and happily paying tax on that as if it has is idiotic.

You’re not convincing anyone. Capital gains tax wouldn’t exist if that were the case.

I’m not trying to convince. I’m literally stating the principle that’s been in operation for decades. Much smarter people than me came up with the reasoning. It’s only a govt with no money and no ideas that would try to reset that principle.

What are you saying ? Whoever dies first will pass all of their estate onto the other who will then dispense the necessary?

@lemonts the reality of it is they didn't really work all that hard and were very well paid with great T&Cs. However I do realise that many in the public sector feel hard done by as the default mindset.

We have mirror wills. Last one standing gets everything then all our kids get their share when the survivor dies.