Last Monday, Andrew Tyrie, chairman of the Treasury Select Committee branded Conservative inheritance tax changes a “mess.” He is right.
In the summer budget, the Chancellor announced plans to create a £175,000 transferable tax allowance – due to be implemented gradually from 2017 – for homeowners who wish to pass their home to their children or grandchildren after death. This will be added to the existing £325,000 allowance, creating an effective tax allowance for couples of £1 million by 2020/21. The new band will also be available when a person downsizes and assets equivalent to the difference in house prices are left to a direct descendent or if a person ceases to be a homeowner. This will allow individuals and couples to downsize in old age without suffering tax disadvantages, which could incentivise them to remain in larger homes.
Whilst the aims of the changes are sensible, they add further complexity to a tax that, according to the Office of Tax Simplification, already has 91 different reliefs. The rules on how the band can be shared between married couples, what happens if one of the couple has already died and how the band is affected by successive marriages are complicated. To quote Mr Tyrie the new rules “are a mess of complexity and uncertainty.” They almost certainly don’t need to be. As it stands they will have the effect of generating more work for lawyers and accountants and be expensive for taxpayers to administer.
This is unfair to those who do not have children and hence can’t benefit from the new threshold. The new relief is only available to people wanting to leave property to their direct descendants. It is also not right that the state is attempting to dictate what people should do with their own money by determining to whom they should leave it.
There is no doubt that inheritance tax is ripe for reform. However, while the proponents of inheritance tax present it as a method of preventing the concentration of wealth in the hands of a few, the near fourfold increase in real UK house prices since 1993, means families who were never intended to be subject to inheritance tax, and could not reasonably be described as rich, are increasingly being dragged into paying the tax. The Office for Budget Responsibility predicted in March that by 2019/20 inheritance tax would cover 11.6% of deaths. Of course, many of the wealthiest choose avoid inheritance tax by giving their estate away as a gift to beneficiary’s at least 7 years before death. This means the burden falls heaviest on those who get sucked into it unexpectedly.
Inheritance tax is also widely seen as unfair. Money that has already been taxed through income tax, capital gains tax and dividend tax is subject to another wave of taxation. It’s a basic human instinct to want to leave loved ones our estates.
Also, where bank finance is restricted, inheritances can provide a key source of finance for business start-ups. Inheritance tax can therefore damage entrepreneurship, incentives to invest and ultimately economic growth.
If the Chancellor feels unable to cut inheritance tax completely he could improve it in a way that doesn’t add complexity. In March the Centre for Policy Studies recommended eliminating many of the complex inheritance tax reliefs and instead cutting the inheritance tax rate from 40% to 20%. If this can’t be achieved the government should simply increase the threshold before inheritance tax is paid. This would be a simpler way of making the system fairer without adding extra complexity.