Inheritance tax - a morbid tax but one which impacts a loft of middle class families

[mids2019]

Inheritance tax may be on the increase in the next budget but having just been through probate it for me thinking that iht really impacts a lot of lifetime savers and those with property.

Parents have already paid tax on the income they have saved so there is a moral question over the governments ability to.tax the money again. Is this really fair and isn't it a right we should have the ability to pass on our property to our children?

Also surely it is the middle classes that suffer as I guess anyone with serious wealth protects their assets through complex tax avoidance schemes e.g. footballers, celebs, bankers etc.

There are tons of loopholes, the easiest and most obvious is gifting to relatives more than 7 years before dying. Amazed that people use this to defend IHT!

But no taxes are calculated based on what someone costs. What makes this example in particular unfair?
It didn't cost the uncle anything at all. His prudence presumably enabled him to enjoy a comfortable life. Surely he didn't live his entire life to provide extended family with money? And if he did, he had a lifetime to do so if paying the tax was so abhorrent.

That's a statutory relief not a loophole.

It’s unfair that because he didn’t have children the extra allowance of £175k was not applicable. He did pass his property on to his family, but did not have any direct descendants. My dm died this year and her estate was double the size, but no tax as she had direct descendants who inherited the property- that’s why it seems unfair.

I'll get shot down in flames for this, but I can't see the justification for that extra £175k of threshold if you leave your house to your children or grandchildren at all. It must have taken a considerable number of people right out of IHT.

I was an executor for a childless, non-married relative. Total estate was around £400k so inheritance tax was payable. He wasn’t rich- the estate was his bungalow and a small amount of savings but became one of the 4%. I’m not sure that it was fair that his estate had to pay inheritance tax given many others can pass on tax free.

Why is that unfair? He is dead, it's not unfair to him. Indirect family members still got free money. Where is the unfairness?

Seeing houses as "investments" is a large part of the issue. If houses were just "places to live", where buying one just meant having security of owning the place where you live and trade off having to pay for the upkeep and repairs vs not having to pay rent once mortgage was paid off rather than this never-ending upwards spiral of imaginary "wealth". That means younger people can't afford to buy (unless they inherit a big deposit!), buy-to-let landlords with increasing rents and decreasing security for renters and these "disingenuous middle-income south-easteners" being swept up in having to pay inheritance tax.

So tax of 40% was payable on the £75000 left after deducting the £325k threshold. £30000 tax paid, £370000 distributed to family members or friends. That doesn't seem too bad to me.

But the uncle is (sadly) dead. So who is suffering from the "unfairness"?

I'm single and child free. All being well for the next couple of decades, when I die my estate will pay tax before it passes to my nieces and nephews. DSis1's estate (same size) won't pay tax before it passes to her children. I can see that this does seem unfair. But so if the fact that my nieces and nephews will inherit twice where most inherit once or not at all.

The unfairness is that of two estates the same size one has to pay tax and the other doesn't. If we had different levels of income tax depending on if you had kids or not everyone would see the unfairness pretty clearly.

They are - you pay the tax when you buy the ticket. Every ticket is taxes, which raises more than taxing only the winning tickets.

Bets at the bookies are the same (or were, when my reprobate uncle used to take us with him.)

It’s unfair that the rule is not applied across all estates and the allowance is only applicable to people who have children. Why should his estate be subject to IHT for the sole reason that he did not have any children? My DM’s much larger estate is tax free because she did have children.

In and of itself no I don’t think it’s necessarily unreasonable if most people paid inheritance tax. However, i suspect the 4% actually paying it are people in his situation rather than the very rich. If you compare it to someone else who had been married and able to leave £1 million tax free plus unlimited in pension if they die before 75 then at that point I think fairness does come into play.

Exactly.

I don't know that unfairness is the word. Most people with children want their money to pass to them, after taking care of any spouse or partner. Many people who don't have children choose to leave all or part of their money to charity or friends rather than all or most to family. Politicians are just recognising that this is how it is.

in this case he left the entire estate to a family member so imo unfair that tax is paid because this family member is not a direct descendant.

Who is it unfair to though?

I'm finding this thread very useful, actually, as now I'm thinking about it I'm firmly of the view that if we've got to have tax increases finding ways to raise more from inheritance tax is a good way to go. Social mobility in the UK has gone into reverse and house price inflation has to be part of that. If I were Chancellor (and you can all be very grateful that I'm not) I'd get rid of that allowance for leaving your house to your direct descendants and I'd freeze or even cut the basic threshold of £325k. I'd probably combine that with some form of tapering of the tax payable so that it started at 20% and gradually rose to 40%. I'd also give HMRC the money and the clout to clamp down on tax avoidance schemes with a view to increasing the amount of tax collected. All of this would mean that far more estates would contribute something instead of only 4%.

@Gasp0deTheW0nderD0g thanks again. My cousin is an accountant actually, so I guess I should talk to him!
I do live in the family home and due to my disabilities am not really very responsible with finances etc. it's all dealt with by my mum and I'm really worried about this big burden on me at a time when I'll be extremely distraught with bereavement. But from what you and some others said it might not be as bad as I thought.

I am very grateful and lucky to be having assets passed on to me, so I do not want to appear ungrateful. And of course I don't want to dodge my taxes, but It really is just a bit scary for me.

@ShanghaiDiva, putting together what you've said on this thread:

my experience is: estate 450 k tax to pay - this is presumably your uncle
estate 775k no tax to pay - this is presumably your Mum

First of all condolences on your losses.

Your Mum's estate wasn't subject to IHT because she left her house to her children and presumably your Dad's unused IHT threshold was applied as well.

Your uncle's estate was subject to IHT because he didn't have children and was presumably single. By my calculations, the tax payable is £50k. So your Uncle was able to pass on £400k to relatives, which is a very substantial sum.

The unfairness, if there is any, seems to me that your Mum's estate didn't attract any IHT, rather than your Uncle's estate paying that £50k.

Between the two of them, they were able to leave a lot of money to their family. This is a very privileged position to be in, isn't it?

Exactly ! There is zero unfairness other than a distant relative getting slightly less free money than they might otherwise have hoped.

I hate the term check your privilege but there's a lot of people here who seem unable or unwilling to realise quite how well off they and their families are relative to the majority of the country.

IHT is flawed and a blunt tool, but it is the least unfair tax.

What a person leaves when they die is leftover wealth. They didn’t need it to exist day to day, they weren’t calling on it to meet the leccy bill. It’s all the money and property they accumulated in life that’s left over when they are dead.

Of that, some (a tiny 4% of estates) leave a significant amount behind. It’s entirely reasonable to divide that up between the society that allowed them to financially prosper and those members of the family and friends the deceased would like to give things to.

No one succeeds on their own efforts alone. Society gave them an education, health care, legal system, security services, local and national government structures to oversee that, infrastructure making their life possible, etc etc (damn, I am channeling What The Romans Did For Us)

All of those things are extremely expensive. If part of that is funded by the wealth accumulated by people who did well (I.e. that 4%) after their need for the money is over (because they are dead) - that sounds an excellent way to pay for it.

And yes, I will be a beneficiary of an inheritance that will probably pay inheritance tax. And no, I don’t mind because I did not earn that money to begin with.

My parents’ hard work and astonishing good luck in housing prices does not equal MY entitlement to free money.

@ babaYetu Society gave them an education, health care, legal system, security services, local and national government structures to oversee that, infrastructure making their life possible, etc etc

But they contributed to that via income tax.