Inheritance Tax was initially introduced on the idea of redistributing wealth for the benefit of the general public.
The principle being rather than the rich getting exponentially richer through large inheritances, a portion of their wealth is redistributed to the public through taxation.
However, if you thought Inheritance Tax (IHT) was just for extremely wealthy people to worry about, think again.
Rising property prices in particular means that IHT receipts paid to the Exchequer continue to rise.
HMRC collected £5.13 billion in IHT in 2019-20 and the amount collected in the future is currently expected to reach £6.3 billion by 2023-24.
The Organisation for Economic Co-operation and Development (OECD) is the latest body to wade into the IHT debate – on a global scale.
IHT and similar gift/estate taxes raise a very small portion of overall tax revenues in the OECD countries that have them.
Even in the UK, which levies that tax at above the OECD average, IHT produces less than £1 in every £100 of tax revenue.
The OECD thinks this is a missed opportunity.
In a report published in May 2021, the OECD says: “Inheritance taxation can be an important instrument to address inequality, particularly in the current context of persistently high wealth inequality and new pressures on public finances linked to the COVID-19 pandemic.”
The report makes a range of recommendations on how to structure inheritance taxation, including:
- It is preferable to levy tax on the recipients rather than on the donor’s estate – the opposite of the UK approach. However, the OECD did not support the idea that transfers should be taxed as income, a suggestion that has emerged from some think tanks in this country.
- Ideally, a tax based on beneficiaries should cover gifts and bequests they receive over their life, subject to a modest lifetime exemption. The OECD is no fan of regular or renewable exemptions – a feature of UK IHT – because of the scope they offer for avoidance. It accepts that the lifetime approach creates increased administrative and compliance costs.
- Exemptions or reliefs for business assets should be carefully designed and alternatives considered. The OECD questions the UK design, highlighting that “relief for business and agricultural assets predominantly benefit the wealthiest households, significantly reducing the effective tax burden on some of the largest estates.”
- Legislation should not allow planning through trusts to significantly reduce the tax burden on wealth transfers.
- There should be consistent tax treatment of unrealised capital gains between gifted and bequeathed assets. Here the OECD echoes comments from the UK’s Office for Tax Simplification (OTS) own reports on capital taxes.
Will the Chancellor pay any heed to the OECD’s proposals? We await his response to the OTS reports on the future structures of IHT and capital gains tax which could appear in the Autumn Statement.
In the meantime, if estate taxes concern you, it could be worth putting plans in place now, while the current rules exist.
At Armstrong Watson, our quest is to help our clients achieve prosperity, a secure future and peace of mind.
Our guidance for anyone considering taking advice about estate planning is that now may be a good time to do so whilst all existing reliefs and allowances remain available for those who are in a position to take action.
Please contact Justin Rourke on 01768222071 or email justin.rourke@armstrongwatson.co.uk
