Radical Inheritance Tax change proposed as Labour ‘plans Budget raid’ | Personal Finance | Finance
A radical shift in inheritance tax to transfer the burden from the estates of the dead to the recipients of cash and assets has been proposed by a think-tank close to Labour.
The UK is expected to see £5.5 trillion in assets passed down between generations between now and 2050, including £1 trillion in the 2020s.
Currently inheritance tax is charged against the estate of the person who has died before the remainder is distributed to those named in the will.
However, the Resolution Foundation, which has close ties to Labour, argues the tax should be transferred to the people who receive the bequests in a move that would see far more hit with a tax on these windfalls.
The transfer of the burden would also put a stop to wealthy families from minimising their IHT bill by taking advantage of various exemptions, such as buying certain types of shares or agricultural land.
Currently, only 4 percent of estates are hit with inheritance tax (IHT) while figures show that estates worth £10 million often manage to minimise the amount paid through taking advantage of exemptions.
Existing IHT rules means the first £325,000 is tax-free, after which an estate is potentially liable to a flat-rate of 40 percent, which is taken off before the assets are distributed.
However, this threshold can increase to £500,000 if you give your home to your children or grandchildren. And there is no IHT to pay if you leave your estate to your spouse or civil partner, meaning that it is effectively possible to pass on up to £1million without paying the tax.
IHT raised £7.5 billion in the last tax year, however shifting to a regime that removes exemptions and shifts the burdens to recipients could, it is claimed, see this figure rise by more than £5 billion a year.
The proposals were first put forward by the Resolution Foundation in 2023 when it was headed by Torsten Bell, who was elected as a Labour MP earlier this year.
Economist at the think tank, Molly Broome, told the Telegraph: “We are still very much in favour of scrapping IHT and moving to a lifetime tax on recipients.”
Separately, the Foundation has drawn up proposals to tax gifts from the wealthy, should they wish to pass on cash and assets before they die. In this case the rules for a recipient’s tax would include:
A lifetime tax-free allowance of £125,000
A basic rate of 20 percent tax on receipts up to £500,000
A 30 per centtax on receipts of more than £500,000
An annual gift allowance of £3,000
Currently, people are able to pass on wealth to loved ones free of inheritance tax if they may the gift at least seven years before their death. The Chancellor Rachel Reeves is understood to be looking to extend this period to 10 years before death.
This would have the effect of raking in more tax and encouraging wealthy older people to pass on wealth earlier in life. This could boost consumer spending and the economy because recipients would use these windfalls to get on the property ladder or fund other major purchases.
In a book published in 2018 the Chancellor said IHT needed to be reset or ‘shifted wholesale’ to a tax on recipients of gifts throughout a lifetime.
IHT is one of Britain’s most hated taxes, not least because it is paid in the immediate aftermath of bereavement. Critics also say it punishes the prudent, who have saved throughout their lives, adding it is ‘anti-aspirational’.
The Foundation claims that the tax system ‘badly needs to respond’ to the way increases in housing wealth and other assets have created ‘winners and losers’ based on luck such as ‘being born to the right parents’.
It concludes: “It may well be worth ripping up existing IHT legislation and starting again with a new system that delivers all of these desirable changes at once and is fit for the coming decades and the increased flow of inheritances they will bring.”
Most advanced economies already tax those who receive an inheritance, rather than the estate, and as a result take more money from their citizens. France, for example, raises twice as much from this type of wealth tax than the UK.
A Treasury spokesman said: “We do not comment on speculation around tax changes outside of fiscal events.”
