If you leave an estate worth more than £500,000 to anyone other than your spouse or civil partner, they could face a 40% tax bill. Is that fair? We seek some opposing views.
Yes
Jason Hollands from the wealth manager Evelyn Partners
Various forms of death duties have existed for centuries, but the amount paid is growing. Inheritance tax (IHT) receipts hit a record £7.1 billion in the 2022-2023 financial year.
People who would not regard themselves as lavishly wealthy are being drawn into the IHT web because the tax-free allowance has been frozen at £325,000 for 14 years. Anything you leave to a spouse or civil partner is exempt from IHT but if your estate is worth more than £325,000 other beneficiaries could pay 40 per cent tax on inheritance over that threshold. This may even mean a tax bill on gifts made when the person was alive, potentially landing people with unwelcome tax bills on money already spent.
Where a main residence is passed on to direct descendants — children and grandchildren — an additional tax-free allowance of up to £175,000 may be available, depending on the size of your estate. Unused allowances can be passed on to spouses.
But, with allowances set to remain frozen, the number of families paying IHT is expected to soar 43 per cent by 2028, when the baby boomers who hold much of the nation’s private wealth will be reaching their eighties. The Office for Budget Responsibility forecasts that £8.4 billion will be paid in IHT in the 2027/28 financial year.
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Surveys suggest that the tax is unpopular. It is seen as unfair because it is a form of a double taxation on assets that were already taxed during life. It also goes against the grain of many people’s desire to look after their families. Those paying the price are not the deceased but typically their children and grandchildren. The expected surge in inheritance over the next decade could help those who have struggled to get on the property ladder or have graduate or mortgage debt.
IHT can be mitigated in many ways, but this requires complex planning — so the system favours those with the foresight and means to pay for professional advice.
IHT is set to hit way too many people. At the very least there should be a big increase in the threshold — or better still, IHT should be abolished altogether.
No
Ryan Gordon from the wealth manager JM Finn
Inheritance tax falls under scrutiny each time there is an economic challenge. In a cost of living crisis, once again we are left musing about the supposed benefits IHT offers society and whether the tax truly achieves its objectives.
In principle, IHT is a tool that is designed to restrict the most affluent from passing excessive capital across generations. The tax redistributes that capital.
In reality there are various barriers that result in this tax not being as effective as it should be. The criticisms of IHT stem largely from the fact that it is a double tax, levied on capital that has already been taxed during life. Additionally, IHT is complex and — with appropriate estate planning — may be mitigated fairly successfully. Those who do not organise their assets effectively, however, are often stung with a hefty 40 per cent levy on their capital.
So what is the solution? Perhaps the question should not be whether it is abolished, but rather how could it be reformed so that it limits the build-up of excessive wealth but equally is less severe for those who are not eligible for IHT reliefs or those who have not undertaken any estate planning.
In 2020 an all-party parliamentary group suggested that a flat rate of IHT at 10 per cent be charged on death and lifetime gifts. This would encourage fewer avoidance measures from high-net-worth individuals while also not affecting them as aggressively. The report also emphasised that for the reduced rate to be effective, the mitigation reliefs must be simplified or abolished.
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IHT does not appear to achieve its objective in its current state but simplifying the regime could see a fairer IHT levied with little impact on the government’s receipts.
