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!

No, if a person inherits money it's usually from a beloved family member. Its not as if people inherit from randoms.

By taxing the recipients of gifts.

Well, obviously, don't scrap it, but reduce the rate and thresholds so that it's not worth the effort to do major tax planning.

I.e. bring down the threshold to, say, £100k, but have a fixed percentage tax rate of say 10%. More people will pay it, so it will bring in a lot more revenue.

At the moment, it jumps from 0% to 40%., i.e. yet another stupidly high marginal tax rate of 40% which just drives people to take planning action to bring the estate back down into the 0% band.

The recipients don't pay the tax. The executors do.

That’s semantics. And untrue. The estate pays it and the net result would be exactly the same as IHT.

Not sure what difference it makes to the lucky recipient (or the unlucky non-recipient) who the gift was from.

If someone works for £50,000 they pay tax on it.
If someone inherits £50,000 they do not.

How can that be right?

Is it semantics or is it untrue? It can't be both.

If you received an inheritance cheque in the post please tell me how much tax you would pay. The answer is £0.

But debts have to be paid from the estate in the UK too, so reducing the amount available to be paid to the beneficiaries. Debts only die with the deceased if they had no assets from which the executors could pay the debts.

Why is it unreasonable for kids to get rich of the backs of their parents?

my parents worked bloody hard to leave money for us, likewise I will do the same for my kids. I live in an area of high deprivation and the only way my kids can afford a house is through inheritance- why is that wrong?

It can easily be both. And it is.

It would be net of tax already. If no tax was paid then the cheque could have been bigger.

@Laptopfangirl

The recipients don't pay the tax. The executors do.

They may not send the cheque to HMRC, but as the tax has been paid out of the estate, it reduces the amount available to be paid to the beneficiaries, so in reality, they have paid the tax, i.e. they'd have received more had the tax not been paid. It's just like PAYE in that tax has been deducted at source before payment. Net effect is the same.

But if they inherit £50k the tax has already been paid by the benefactor, you want the government to get double tax?

Quite. But there is a left wing ideology to say it is wrong to try and give your own children an advantage in life. To the extent that some have gone as far as saying you shouldn’t read to your children as it gives them an advantage over those who don’t get read to. Strangely this doesn’t seem to apply to their own though kids - especially in politics or the arts.

Because the £50k has already been taxed. Why is taxi g the sameoney twice good?

It's not wrong. It's the politics of envy. If this government see someone else with something a relative has lovingly left for them to benefit their first thought is oh let's tax them and give money to benefits people.

Because we pay tax numerous times on the same money all the time. You know this, it’s been explained to you enough. And most large estates are comprised in part of property profits from main residences and that money has never been taxed at all.

Small estates are also usually compromised from property profits that have never been taxed. That's why I'd rather have a low threshold of £100k and a much lower IHT rate of say 10%, so that it's fairer, i.e. Aunt Mildred's house that has risen in value from £5k when she bought it decades ago to £350k when she died. Why should that be IHT exempt?

Money gets taxed twice all the time. You've paid income tax on your wages, then you pay VAT, fuel duty, council tax, tax on savings interest.

If we ONLY taxed income once, we'd have dirt tracks for roads complete with highway robbers and no public services.

So the end result is exactly the same. Only the terminology changes.

Not worth doing, and a bad idea.

So you think a certain pot of money should NEVER be taxed twice over?
No VAT if you paid income tax (and the lowest earners don't pay income tax but pay more VAT per £1 earned anyway because they can save less and are unlikely to have a mortgage).

Nobody who's paid a salary out of someone else's taxed income will pay income tax? I suppose that might level up the cleaners, carers paid out of pensions, nursery workers, tradespeople who work for a small company?

No tax on interest from savings or investments?

I mean, it's a nice idea but not at all practical.

Context is your friend. I never said money should never be taxed twice. I mentioned VAT to show how the layers stack up, not to suggest scrapping it. So your examples are apples and pears. A cleaner or carer paid out of someone's pension is earning new income for work they've done, so of course they pay income tax on it. Interest on savings is new money being generated. VAT is a tax on spending, paid by everyone at the till.

Inheritance tax is different. No work has been done and no new money has been made. It's the same pot that was already taxed when it was earned. It doesn't stop being already taxed money just because the person who earned it has died. That's the bit I think is unfair, not the whole tax system. Taking care of your family doesn't have to stop when you die.

The system isn't even consistent about it. If a parent gives money to their children and lives another seven years, there's no inheritance tax. Same money, same child, but taxed or not depending purely on when the parent dies. And the government is happy to treat parents and adult children as one family when it comes to student finance or cutting benefits, but when the parent dies, suddenly oh but they are separate people and the money's fair game. You can't have it both ways.

As for levelling up low pay for nursery workers and carers etc, feel free to look at the minimum wage, how those sectors are funded, and the revolving door of red, blue and orange incompetence at No 10 and No 11 Downing Street. There are the real structural failings. IHT on ordinary working people's estates, is a very different thing from generational wealth or the super-rich.

Or, maybe work out how much support someone has received from the state over their life after the age of 18 and repay that first, then tax it as income, then the recipient has whatever is left.

No?Why not? Is it because those on low incomes "need it" more? Hence the talk about only taxing if someone meets the income threshold?

And even worse is tax on tax, i.e. VAT is added to the fuel duty charged on petrol/diesel.

Yes, it affects very few people. Most people will be more affected by care needs (at home or in a home) than this.

No you don’t. You are very very wrong.

The IHT is applied AND you will pay PAYE, yes if the person is over 75, but most people leave to their spouse and the next generation will likely get it after 75 if there are two parents. I can’t believe people don’t know this!!

As I say, add RNRB reduction and 87% is a very real possibility.

And to add, even the spouse pays PAYE if the owner was over 75, so it’s unavoidable for some.