Inheritance Tax is unfair to families and should be scrapped, a think tank has urged.
Resolution Foundation, a think tank working to improve the living standards of people on low and middle incomes, says a new inheritance tax system is needed.
The amount of wealth passed on through inheritance has doubled to an incredible £100 billion over the past 20 years and is expected to double again over the next two decades.
But as people have more wealth to pass on, they are more likely to have to pay tax on those assets when they die.
The taxman took some £5.3 billion from estates in 2017, according to figures from NFU Mutual. That’s despite the fact that only around 4% of estates are currently subject to inheritance tax.
Inheritance tax is paid when someone dies and their total assets are worth more than £325,000. Any assets over this amount are subject to tax at 40%.
Adam Corlett, senior economy analyst at the Resolution Foundation, says: “The current system of inheritance tax manages the uniquely bad dual feat of being both wildly unpopular and raising very little revenue.”
A new residence nil-rate band is being phased in from this year, which will mean that by 2020 individuals will be able to pass on an additional £175,000 when leaving their main residence to a direct descendant.
But those against IHT point out that, this move aside, the inheritance tax allowance hasn’t increased since 2009. This leaves homeowners at a significant disadvantage because since then house prices have climbed around 36%.
If the IHT allowance had increased in line with house price inflation, then a couple would now have a joint tax-free allowance of £887,900 to pass on rather than the current £650,000.
Resolution Foundation says inheritance tax is “not fit to deal with wealth in modern Britain”. It wants to see it replaced with a Lifetime Receipts Tax at a much lower rate.
This would work by taxing those who benefit from an inheritance rather than taxing the deceased’s estate as a whole and, crucially, would only apply to inheritances greater than the lifetime allowance.
Mr Corlett adds: “Rather than tweak our failed inheritance tax system, it should be scrapped altogether and replaced with a new Lifetime Receipts Tax. This would be fairer to families, harder to avoid and would ensure our tax systems keeps up with 21stcentury Britain.”