UK think tank calls for abolition of inheritance tax

Inheritance Tax should be abolished in the UK and replaced with a new tax on gifts to individuals over £150,000, according to a new report.

The report from the Institute for Public Policy Research argues that Inheritance Tax is no longer worth defending in the face of declining revenues and public hostility, and that there is a strong case for replacing it with a progressive Capital Receipts Tax on cash and non-cash gifts. This would stop tax avoidance by the super rich and reduce wealth inequalities in Britain.

The leading think tank wants to see a Capital Receipts Tax on gifts worth over £150,000 with a band system to tax bigger gifts at higher amounts, up to a maximum of 40%, while gifts between £150,000 and £300,000 would be taxed at 20%, those between £300,000 and £450,000 at 30% and gifts over £450,000 at 40%.

Gifts between married or civil partnered couples would be completely exempt and the tax reform would be a direct contribution to reducing wealth inequality, promote a wider distribution of wealth by creating an incentive for a wider disbursement of estates so as to limit beneficiaries’ tax bills, and remove the ability of the very wealthy to dispose of some of their assets during their lifetime.

It says that a Capital Receipts Tax on gifts above £150,000 would raise £1 billion more revenue than Inheritance Tax does now and the extra funds could be used to expand free nursery education to promote social mobility. The tax reform would raise enough to offer a free nursery place to the poorest two thirds of families when their child reaches the age of two, it claims.

‘Inheritance Tax has historically played an important progressive role in our tax system. But it now raises only £2.2 billion from a dwindling number of estates. It is also highly unpopular, despite best attempts to defend it. There is no political prospect of radically increasing its scope and revenue, so it is time to give up on it. It should be abolished and replaced with a Capital Receipts Tax on gifts,’ said Nick Pearce, ippr director.

‘A Capital Receipts Tax on gifts above £150,000 would raise £1 billion more revenue than Inheritance Tax does now and would be a fairer means of increasing equality of opportunity. It would spread wealth better across the generations, by incentivising families to pass on their wealth to a greater number of children and grandchildren,’ he explained.
  ‘The proceeds of a switch from Inheritance Tax to a Capital Receipts Tax could be used to fund an expansion of free nursery education, a key driver of social mobility. This would be the best way of passing on opportunity, not privilege, from one generation to the next,’ he added.

Currently Inheritance Tax is paid at a rate of 40% of the value of the estate above the £325,000 threshold. Because tax is paid only on the value of the estate above the threshold, the average, or effective, tax rate is always less than 40%. An estate of £1 million, for example, will pay £270,000, an effective tax rate of 27%.

Inheritance Tax is paid on the estate of a person who has died and, far less often, on gifts and trusts made during the last seven years of that person’s life. Inheritors are allowed to pay Inheritance Tax liabilities over a 10 year period, if the value of an estate is tied up in a house, or when the house is sold. Over 80% of homes are less than the Inheritance Tax threshold.

Inheritance Tax is not paid on any assets left to a spouse or a registered civil partner. When the first spouse dies his or her unused Inheritance Tax nil rate band can be transferred to the second spouse. The threshold of married couples is, in effect, doubled.

Since the change to Inheritance Tax for married couples and civil partnerships in October 2007 the number of estates paying the tax has fallen from 34,000 estates in 2006/07 to 15,000 in 2009/10.

Revenues from Inheritance Tax peaked at just under £4 billion in 2007/08 and are expected to fall to £2.2 billion in 2010/11.