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!

But the person that dies doesn’t pay the tax now so no difference

There is a big difference in perception. Everyone moans that IHT is double taxation, because people pay income tax and then their estate pays tax again when they die. That's not an unreasonable complaint.
But if the estate didn't pay the tax, and instead 100% of it was passed on to whoever the dead person wanted, problem solved.
Instead, whoever receives it pays tax on what they receive. And why shouldn't they? If I earned £100,000 I'd pay tax on it. Why shouldn't I pay tax if I get gifted £100,000 in a will? I should probably pay more!

If there was a threshold, the dead person could redistribute their estate to lots of people so that the threshold wasn't met by any of them, and then nobody would pay tax at all. Which would seem a good incentive to redistribute wealth more widely.

It’s a rubbish argument. Most people’s estate comprises largely of the increase in the value of their property over decades. How has that already been taxed?

They should be taxed on withdrawal, but upto 87% - that seems extreme to me, and will put people off saving enough for their retirment.

Very few pay IHT.
Many people dread it.
Makes abolishing it a vote winner for the Tories in "middle England".
Wonder why they suggested it?

Taxing gifts could cause issues with house sales in house rich/cash poor estates.
At the moment probate sales are done quickly because you have 6months leeway to pay IHT.

Don't like the taxing gifts suggestion, sorry. Gifts shouldn't come with strings attached.

Who’s being taxed at 87%?

But again, really it's not the ILs being taxed. It's their heirs. Is it good for society as a whole that some people, by virtue of having parents who live in a particular part of the country, get a windfall of several thousand k and others don't? The UK's high flying professional jobs are disproportionately in London. If only the heirs of Londoners can afford to live in London, this works very strongly against meritocratic access to top careers. V problematic.

Although perhaps it will force a redistribution of good jobs around the country, which would be a good result.

In theory yes, but you are basing assumptions that everyone bought low and can sell high. As time goes on, this is no longer the case.

Also money has been spent in those houses..... Mortgage interest, upgrades, if you were able to deduct expenses like you can with let's, the profit would be much smaller.

DM bought a house 30 years ago, a second house, so capital gains applied. But..... She lost money. The house doubled in price, but she had a small mortgage, let my brother live in it for free, saving the state housing costs. It was not looked after, and when sold she had a capital gains bill of 60K........ Even though she had made no gains! Piss poor planning, but all these wealthy pensioners with their big houses aren't necessarily "wealthy".

Oh, and she also spent £1k a week when she went into a care home for two years. Not much wealth left after all that.

So if you have money in a pension

1st tax is 40% IHT
2nd tax if you are a top rate tax payer (as a beneficiary) 45% (off the balance)

3rd tax if the estate lost their RNRB due to the addition of pensions, the marginal additional rate on the estate is 20%

Added together (as that is what happens) the total tax load, admittedly at it's most punitive is 87%.

Plenty of people will pay 52% (40 + 20 basic rate) on pensions, so this feels pretty harsh.

Everyone should be able to pass on their own wealth and belongings to their own DC and DGC if they want to. I don't think passing on your wealth and assets should be taxed. If others want things let them work for it. My DS has helped me build up my BTL portfolio, has done lots of jobs on the various houses over many years. Why do you think people want to leave things to government to give to strangers?