Think tank suggests measures in effort to make inheritance tax fairer
The estates of UK residents are set to take a further beating with the introduction of a series of measures including capital gains tax (CGT) on death, a tax banding system and the reduction in special allowances if current proposals are adopted.
The Institute for Public Policy Research, which came up with the plan, was tasked with making the inheritance tax system fairer.
What it has recommended may be fairer but it certainly is more harsh: apart from the addition of the CGT (which is to be set off against the IHT bill), other proposals include reducing the current generous agricultural/business relief. The one point in favour of executors is that they should be offered an increase in 'payment by instalments' options.
However, the core recommendation of the report is the argument that the easiest way to make IHT fairer is to introduce a banding system, similar to income tax, with a basic rate of 22% and higher rates of 40% and 50%. This would mean 87% of estates would pay less, but the new system would still raise an extra £147m.
However, Gerry Brown, technical marketing manager at Scottish Life International, warns that only the first £25,000 estate beyond the current nil rate band of £263,000 would be taxed at 22%. After that the next £475,000 would be taxed at 40% and the remainder at 50%. This is not a very generous reduction in tax for those just in the IHT 'net' and indeed the overall IHT 'take' will increase.
Brown also warns that if there is a CGT charge on death many people could be disadvantaged. Individuals with no IHT liability will find their estates being hit by CGT.
Currently assets held in agricultural and business assets are largely exempt from IHT. If these reforms go ahead then those who have relied on these reliefs will have a higher IHT liability.
Brown questioned: "Is the report a stalking horse for a government policy to increase the IHT yields through increases in the rate of tax for many estates coupled with an erosion of some of the current reliefs?"
According to Margaret Jago, technical manager at Scottish Equitable International, the report reinforces that it is important people do IHT planning.
Anne Young, senior technical manager at Scottish Widows, said: "The proposed top rate of IHT of 50% on estates over £763,000 could hit many people and would particularly be a blow to those house-buyers who have pushed themselves to move up the property ladder - paying for their mortgage in many cases out of taxed income.
"The Inland Revenue receives a substantial amount of funds from IHT (about £2.5bn in 2003/04) so it is unlikely that they will follow the example of Canada, Australia and, soon, the US in abolishing the tax. The intake from IHT will actually increase dramatically over the next quarter as we are now in a house-owning generation and we foresee many more people adversely affected by the proposal than predicted.
"Well-drafted wills and good tax planning advice will be even more essential for this and future property rich generations."
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