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!

It’s only unpopular with the wealthy.

Most people will never pay or worry about inheritance tax.

only 5 % of estates pay IHT

So the kids get equal shares ? We don't have that as I am worth twice as much as my husband. His children will get his worth .

We’ve been together 30 years. We’ve built our assets together.

Ok. We're in a different situation.

Completely agree

Tax dead people - they cannot physically miss it.

I also agreed with a poster up top, tax everyone 10%. Stop rich fuckers getting away with shitty loopholes.

Why should an inheritance be taxed when the person leaving the money has already paid tax on it all when they earned that money? I also think the rate inheritance tax starts at needs to be reconsidered dramatically as it’s unreasonable in this day and age.

Not again.

Because they are dead.

You can't take it with you

Tax lawyer here. I’ve been doing this so long that believe it or not I don’t have a strong political view on taxation other than it should be paid and it shouldn’t be so compared. Successive governments over the last 20 years seem to disagree with me on the second point.

OP, your proposal is interesting but it comes down to enforcement. Currently payment of IHT is enforced by withholding the grant of probate until it’s paid. If you give the grant of probate and distribute the funds, how can you ensure that millions of recipients will are on PAYE and do not submit tax returns will pay the tax? How will they know how to calculate what they owe, report and pay it? And how do you keep track of it?

Consider this from the government’s perspective: is it easier to enforce and collect IHT from 100 estates that cannot deal with the assets until they pay the tax, or to enforce and collect from, say, 500 individuals who you have to track down? If the proposal is that the recipient can’t receive the funds until they pay the tax then how is that fair? You are essentially asking them to pay what we call a “dry” tax charge (because they have no actual funds in hand to pay the tax which they are being charged). Many simply wouldn’t be able to do that.

It’s less a theoretical problem than enforcement and practicality imo.

*complicated. Not compared. Sorry, I’m tired!

Unless the survivor remarries. You need interest in possession will trusts to really ensure your kids get the inheritance you want them to get.

Mostly they’re not “loopholes” - they’re the use of various reliefs established by Parliament over a great many years. A trust isn’t a loophole - Parliament (or common law/precedent) specifically created tax exemptions for specific reasons. Likewise the ability to gift assets free of IHT if you live long enough afterwards - again a specific Parliamentary provision not a loophole. Likewise transferring assets between spouses - specific law exempting it from tax. Making use of allowances and exemptions isn’t a loophole. These are all examples of taking advantage of specific provisions enacted by decades of Governments.

Yes, this is a good point. My response would be to say that with a reasonable tax free threshold in place the actual numbers might not be unmanageably high. I imagined it would require recipients to fill in a self assessment tax form like people did/do for the high rate child benefit tax issue.
If this is too complicated, a dedicated separate form might suffice.
Of course people might try to dodge it, but most wouldn't because most people aren't thieves. With appropriate communications, enforcement and administration it should be as fine as regular tax collection is. Imperfect, but largely ok.

I like your optimistic that most people would pay tax when given the choice! I know I would and you would but many years in practice tells me many many people wouldn’t.

That aside, studies show that the top rate of tax that people are generally happy to pay without engaging in avoidance tactics is 20%. That is apparently the psychological threshold where most people go “fair enough, I don’t mind paying that.” If we keep the 40% IHT rate as is but place the burden on the beneficiaries, we will see far less compliance imo.

You're the expert so I don't doubt you. It's a shame though to jettison a good policy for no other reasons than the thought that was are a nation of tax avoiders i.e. thieves.

Unless the last one standing remarries and leaves it all to new partner? You read about it all the time (even on MN)

Australia treat assets the same in life and in death. They charge capital gains tax not inheritance tax. Much more sensible.

I dropped off this thread early on and have dropped back in to see if anything has changed - it hasn't.

When your dad dies he doesn't pay IHT because he's dead. The solicitor who's dealing with the estate/probate works out what's owed and, before the residue can be divvied up, pays the IHT from the deceased's estate, thereby reducing the amount his family will receive. They have effectively paid the tax through the solicitor (a legal third party) before they get their inheritance. No checking up or chasing random relatives by the tax man needed. Why change what works?

Plenty of people say it doesn't work. IHT is the least popular tax of all, and the reason it's so unpopular is because people think that taxing the dead is wrong when the dead already paid tax whilst alive.
You may not agree with them on either the fairness point or the 'dead person paying' point. But if the tax was changed so that it clearly wasn't the dead person or their solicitor paying it, then that complaint would vanish and we would be left asking whether it was fair that living recipients of wills should receive their gifts tax free. I would argue not, and it is an easy argument to make.

Is that the reason? Or is it just that people want to keep more of the money for themselves?

Not happening. Nobody would be stupid enough to marry either of us, we’re too old and we’re both well aware of the financial idiocy of remarriage.

Well that's the reason they give, because the real reason is less palatable to the public. So let's remove that fig leaf and let them argue that they should be allowed to keep the fruits of someone else's labour tax free.

Time and again, people who never imagined they’d be caught out are caught out. They aren’t fools. They’re victims of other people’s deceit and greed. The shame belongs to the perpetrator not the deceived or the naive.

Linda Bellingham, is a cautionary tale.

We have our very own cautionary tale in our family. We’ve both learnt from it. While grateful for the faux concern, can the cynics among you accept that we know what we’re doing and leave it there.

Mirror wills require a great deal of trust between partners as the surviving partner could very easily change their will to leave everything to their own children rather than the partner's children. You cannot predict what might happen after your own death. Will trusts are definitely the safer option.