Inheritance tax should be scrapped says a new report

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Inheritance tax is currently only paid by the estates of 1 in 25 people who die and it should be replaced by a fairer tax. That’s according to a think tank.

Who pays inheritance tax?

Inheritance tax is currently paid by the ‘estate’ of the person who’s died. You don’t pay it when you die and you don’t pay it if you inherit money or property. Instead, those who are responsible for sorting out your legal and financial affairs after you’ve died have to pay inheritance tax to HM Revenue and Customs.

I’m going to talk about ‘you’ paying inheritance tax, but I mean your estate – it’s just that it’s easier to read if I refer to ‘you’.

  • You don’t pay inheritance tax if the money and property you leave behind when you die, once any debts have been paid, add up to less than the inheritance tax threshold, otherwise called the nil rate band. Currently (in tax year 2018 – 19) it’s £325,000.
  • You also don’t pay inheritance tax on any money you leave to your husband, wife or civil partner after you die, no matter how much it is. You can also leave money to charity or a political party without having to pay any inheritance tax. You can also pass on certain shares and far land without there being any inheritance tax to pay.
  • If you leave money or property worth more than this, and you haven’t left it in a trust, you could have to pay inheritance tax at 40% of the value of money and property you own, over and above £325,000 (or £450,000 if you’re leaving property to a child or grandchild). You can find out more about the extra allowance – the residential nil rate band, in my article called ‘How to make sure you get the new £1 million inheritance tax allowance‘.

What is the problem with inheritance tax?

According to the Resolution Foundation, which published the report, inheritance tax:

  • Only raises 77p for every £100 of tax.
  • Is seen as an unfair tax because it’s a ‘tax on the dead’ and because the tax rate is 40%, which is high.

What should change?

The report says that instead of an allowance for the person who’s died, people should be given a lifetime inheritance receipts allowance. This would mean that you’d be able to receive a certain amount throughout your life, tax free, and would be taxed on anything you receive over and above that. The new system would have:

  • A lifetime receipts allowance of £125,000. You’d be able to inherit £125,000 throughout your life, without paying tax on it. This would include any money or property you receive while someone is alive, but would exclude any money given below a threshold of £3,000 a year.

SAVVY TIP: At the moment, you can give away money while you’re alive without having to worry about inheritance tax, as long as it’s below certain levels. For example, you can give away up to £3,000 a year.

  • Anything you received above £125,000 would be taxed at 20% up to £500,000 and 30% above £500,000.
  • As is the case currently, money and property you give to your husband, wife or civil partner would be free of inheritance tax.
  • Change the rules, introduced as part of the pension freedoms in 2015, which mean that if you die before your 75th birthday, you can pass on your pension pot free of inheritance tax.
  • Scrap rules that say capital gains tax isn’t paid by someone who’s died – at least for second properties and some other assets.

Related articles:

Married couples and civil partners can transfer their inheritance tax allowance. Don’t miss out

The inheritance tax allowance is worth £325,000; how can you cut your inheritance tax bill?

 

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