Inheritance tax and labour

[Lm1981]

Rumours are inheritance tax may be looked at in upcoming budget. What changes do you think we will see?

I can get on board with changes to inheritance tax. This would affect me personally so I have skin in this game but I believe that investing in public services is more important.

I will caveat this heavily that I would want to see IHT applied consistently and fairly so the very rich also have to pay it at the same rate as me.

I think extreme generational wealth, those who have millions, should be taxed more heavily.

But I don’t see why someone like my mum, who built herself up from nothing and went to 15 schools in 9 years (so achieved despite the odds stacked against her) should have to face having to give more of her estate to the Government.

Inevitably, however, it will punish those who made something of themselves rather than those who ride on their parents wealth. Which is sickening IMO. The rich get richer and everyone else gets poorer.

The problem is that the very wealthy have financial advisors who get paid a huge amount to get them out of paying tax. 'Tax avoidance not evasion.' The squeezed middle classes are likely to face money coming out of their pocket.

There’s a limit to how much the super wealthy can be taxed - they don’t need to live or work here!

It will be the middle that will pay extra tax.

I have a bad feeling she will go for pensions which will provide easy pickings but would completely destroy people’s willingness to save for their old age. If pensions lose any of their tax efficiencies it will have a huge impact on what people save.

The whole IHT thing is a mess of allowances and exemptions. I know of somebody who left over half a million and a very significant sum outside the estate in a whole of life insurance policy.

The exempt allowance plus the extra relating to owning their own home and unused allowance from their late spouse meant no IHT was paid.

@messybutfun like IHT the allowances for Pensions are way too complex.

They've promised no return to the lifetime allowance which seems sensible. Like many headline grabbers it caused far more problems then it solved.

Limiting tax relief to the basic rate would be a good start. Also a more rigid application of the principle that you put money in tax free but are taxed on withdrawals as income.

Do you mean get rid of the 25% tax free cash?

Again, it would stop people putting money into pensions.

Would it stop them?

Really??

Really.
It would effectively cancel out the tax relief for most people, certainly basic rate payers with a chance of paying tax at a higher rate when you retire.
Tax relief is the main benefit of pensions. There are others but they may also disappear and usually only benefit those who have already plenty.
The instant uplift and the growth on it is not nearly enough for the inflexibilities of pensions and the prospect of not being able to get at your money for decades.

This is the whole point. Mum started with nothing and made money (so did mine). She can spend all of it as she wishes.

Once she’s dead she has nothing to lose and you (and I) may get a smaller inheritance and less of an easy ride on the accumulated wealth. But we don’t objectively deserve to benefit from anyone else’s efforts.

They need to be very careful with pensions. Already a huge number of people are not saving enough for their retirement and anything that makes pension investment less attractive will cause more problems in 20-30 years' time. Although I wouldn't have any objection to pensions becoming subject to inheritance tax. That seems an obvious one, not sure how much it would raise though.

Only about 5% of estates pay inheritance tax. But it's not the wealthiest 5% who can afford to use loopholes and family trust arrangements to avoid paying anything.

It should be reformed - but reformed in a way that captures the generational wealth of the richest families rather than bringing more middle-income families into the net.
https://www.theguardian.com/money/2016/aug/11/inheritance-tax-why-the-new-duke-of-westminster-will-not-pay-billions

I wish they would also reform it to make it a "negative tax" for the poorest. About 60% of households are homeowners (most with a mortgage) and most of those (except the minority who end up needing to spend most of their assets on care) will pass down enough of a lump sum to the next generation of their families to let them be homeowners too but those who are born into a family of renters never get that boost. I'd like to see a system that links to the lifetime ISA (where the government tops up savings for a house-buying deposit) and sets out that if all 4 of your grandparents and both your parents either died with an estate worth less than £16,000 or currently have all assets worth less than £16,000 (linked to the assets threshold for UC) then you get a triple boost into your lifetime ISA, or just a double boost if no more than one of the 6 people exceeded that, paid for out of the IHT of those more fortunate families.

The challenge with IHT is that the best way to avoid it is to have WAY more than enough and hence be able to give away large sums to family members while still living. IHT will only get applied to whatever the person still owns when they die.

Whereas people with somewhat more than enough are more likely to keep it all, and then pay.

Example. Person A has £2 million at age 50, person B has £100 million. They each die unexpectedly at 60. Person A may think they need to keep all of it since that yields a sustainable annual cash flow of about £50-60k, which though not small, definitely does not make them rich. So they keep it all, and the estate pays full IHT.

If Person B spends double what person A spends, they need to keep about £4 million, but they can give away £96 million. Lets say they give away £90 million, and die 10 years later. Their estate is larger at £10 million so there is more IHT due, but £90 million went to the next generation with no IHT.

Realistically the only ways to tax that are (a) annual wealth tax or (b) tax large gifts as if they were inheritances, at the moment of the giving, instead of letting them be treated as "potential exempt transfers" which is how Person B avoided any IHT on the £90 million of gifts at age 50.

Annual wealth tax can work really well in countries with a very stable tax code (think: Switzerland) but most countries have not been able to implement a wealth tax and have it stick. Taxing gifts can be done but is not popular and can cause even more exodus of the wealthiest people, since if they leave the UK and then make gifts several years later, they would avoid the IHT.

One proposal out there (I believe from Labour) is to make IHT applicable to a UK resident who dies within 10 years of moving away. So the estate of a person who leaves at 50 and dies at 59 would be subject to full whack IHT by the UK. It will, however, be interesting to see if and whether that can be enforced.

She won't 'have to face giving more of her estate to the government' as she'll be dead.

There's generous allowances already and the reality is that a large proportion of those who'll die over the next 10/20 years who've 'built themselves up from nothing' have done little more than being lucky with massive increases in housing equity. And I include by own mother in that group too.

I have no issue at all with maintaining or even increasing taxes on people who will pass on/inherit life changing sums of money.

IHT is avoidable. The rich don’t have to pay it.

I’m afraid that the nhs costs of the old have to be paid by the people who are running them up to new heights. The current old haven’t paid enough in to benefit from 10-20 years’ of intensive medical treatment they’re getting. Or to claim state pension for so long.

Drop-kicking Gen Z into poverty isn’t the answer.

Almost nobody pays inheritance tax. Currently, a married couple can die and leave a £1m house to their kids, free of IHT. Most people are living in houses below that value and most people are leaving their estate to their kids. So they aren't paying IHT at all. I don't actually know who is paying IHT. The super rich don't seem to. I suppose it's people who have a house worth just over a million and a bit of cash? I don't know.

Although I don't understand how "the rich" get away without paying it.

Mostly because they don't technically "own" very much in their own names. All their houses and cars and other major assets are owned by something like "The Cholmondley-Smythe Family Trust" which has specific rules about who gets the income from investments and can make decisions about acquisitions of new assets, and how those formulae will change in the event of a death.

Trust Fund kids are people who grow up in such a family, with an unearned income so they can be free to dabble in whatever creative or expensive-to-qualify-for career they like because they don't need to earn their keep.

When someone dies the trust is not subject to inheritance tax as it's not their sole property.

Creating a rubric to determine what proportion of a family trust should be considered to be effectively "their estate" and taxed as part of IHT would be insanely complicated and open to legal challenge. Oddly enough, the trusts in question will turn out to have plenty of discretion to pay for shit hot lawyers if such regulations ever start getting imposed.

We retired a few years ago, and have not yet touched our personal pensions, but are looking to start withdrawing next year. We have been saving for over 40 years, on and off (self employed for the last 30 years, with good years and bad) I have been putting some spreadsheets together to look at the tax we will have to pay depending how we draw the money out. The tax relief on our deposits is outweighed many times by the tax we will pay on withdrawals, however we take the money, so the gov will take far more from us over the next few years than we benefitted from while building the pot up. I know inflation will affect the deposits, but we paid more in in latter years than earlier when we had children to pay for. Our withdrawals will all be at 20%, as we're our deposits. The gov need to be careful that they don't kill the golden goose.

I think they will go after pensions. Maybe I am just pessimistic as it’s the thing that will affect me most.

I would support a 'frequent flyer' airport tax. So on a sliding scale you pay more the more flights you take in a year.

Interesting, thanks!

You didn’t mention that the family trust has to pay the government 6% of the total value of the trust every 10 years. Also, any money taken out of the trust is taxed at normal UK tax rates.

Yep. Except theg might come after trust funds . We’ve given lots away already. We had no parental wealth and I’ve seen many people squander money and have little in pensions. Punishing savers is not a great idea. Take too much away, it’s not worth doing. Also, what about state workers where the state pays a huge amount for their pensions? Are they going to be punished? Or not? This country will never see growth if the wealth creators don’t get much out of it.

So do you think the 325k limit and the £1m (couple , house , children) limits would be impacted?