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Resolution Foundation proposes full overhaul of IHT

Cherry Reynard
Written By:
Cherry Reynard

The Resolution Foundation has called for the government to abolish Inheritance Tax and replace it with a Lifetime Receipts Tax, paid by the beneficiary.

The Foundation is responding to the review launched this week by the Office of Tax Simplification, which is looking at ways inheritance tax can be made fairer and more efficient.

Under the Resolution Foundation proposals, every person would have a Lifetime Receipts Tax Allowance of £125,000. From there, a progressive rate of tax would apply with a basic rate of 20% and a higher rate of 30% above £500,000.

All lifetime gifts would be included in the tax, excluding those of £3,000 or less. At the moment, gifts are exempt after seven years. Transfers between spouses would remain exempt.

The Foundation estimates that in spite of lower marginal rates, the new tax would raise £5bn more than inheritance tax in 2020/21. It also recommended that existing reliefs such as Business Property Relief and Agricultural Relief (which together cost £1.2bn), the treatment of inherited pensions, and the forgiveness of Capital Gains Tax at death (costing another £1.2bn) should also be tightened to reduce the scope for tax avoidance.

Matthew Whittaker, an analyst at the Foundation, said: “It takes something to be crowned Britain’s most hated tax – a bit like being the UK’s worst ever Eurovision entry – but that is the unwanted title held by inheritance tax. It doesn’t help that it’s a tax that’s unavoidably associated with the death of loved ones. And complexity is undoubtedly a problem too. But by far the biggest issue is the sense of inherent unfairness – there’s something fundamentally off-key about inheritance tax.

“Just one-in-five of us think the current approach is ‘fair’ – somewhat lower than for any other tax. It’s viewed as a double taxation of those who have earned the wealth and who have now had the temerity to die and pass their assets onto grieving families. With a flat rate of 40 % (above the nil-rate band), it’s also considered high…But it’s also regarded as a tax that is ‘voluntary’ for the super-rich and well-advised, with a range of reliefs and gifting rules that make it too easy – for some – to avoid.”

He added that inheritances are set to play a growing role in Britain’s living standards story over the coming years. The current value of inheritances is double what it was 20 years ago, and it is expected to double again in the next two decades.