David Semmens
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The legality of inheritance tax is under challenge. Last week Joyce Burden, 89, and her sister, Sybil, 81, lodged a last-ditch appeal in Strasbourg over the rule that each will have to pay inheritance tax on the home they jointly own near Marlborough, Wiltshire, because they cannot have the same exemptions given to married or gay couples in civil partnerships.
The move is just the latest challenge to a tax decried as hitting the moderately well off and punishing the thrifty. If you die worth £750,000 after repaying debts and leaving no spouse or civil partner, then at current rates, 40 per cent of an estate above £300,000 goes to the Treasury – namely £180,000.
This penalty comes after people have paid income tax on earnings and the interest on savings. Not to mention capital gains tax if stocks and shares are sold; or on the net profit of the sale of any investment property; or the stamp duty land tax paid when you bought that investment; or your main home.
Taxed at every turn when alive, good housekeeping is duly rewarded at death with a raid by the Chancellor of the Exchequer on hard-earned assets. Other countries seem to manage without – or at least on a less punishing scale. Italy and Sweden have no death tax. The US has a far more realistic threshold of $1.5 million and in Germany nonspouse relatives are taxed at only 12 per cent.
If geography offers no comfort, then history is little better. When introduced at the end of the 18th century, the legacy tax did not affect surviving wives or children. In the second decade of the 19th century death duties were extended to all relatives except spouses, but the rates were only 1 per cent for children and 3 per cent for siblings up to a maximum of 10 per cent for nonfamily beneficiaries.
It was, of course, estate duty introduced in 1894 that over time punished and even destroyed large wealthy landed estates – through a top rate, by 1939, of 50 per cent on everything above £2 million and by 1969, 80 per cent on estates worth more than £1 million. So it was certainly a “wealth” tax in the true sense. But at the lower end the rates were kinder.
Even IHT proper, introduced in 1985, did not seem too bad.
Between 1987 and 1992 the nil-rate band (NRB), on which no tax was paid, duly doubled from £71,000 to £140,000 to keep pace with inflation. However, while the NRB has risen by 16 per cent in the past five years, house prices have gone up by 60 per cent.
Many believe that IHT has become fundamentally wrong. So what can be done? Radically increase the NRB – or lower the rate to, say, 10 per cent? What about exemption or a better rate for children and close relatives? Or exempt the family home? Or scrap IHT for a small wealth tax? Surely any would be fairer. History has seen many an unfair or immoral tax. But they have tended to end up being ceremoniously or unceremoniously dumped. So, short of successful IHT riots, people should do what they can to lessen its impact.
Anyone in a lasting relationship could perhaps consider marriage or a civil partnership: no tax on what is passed to a surviving spouse or civil partner. But ensure that you use your NRB in your will, either through a discretionary trust or, if you can afford it, an appropriate gift to children or others rather than your spouse. At current rates this will save at least £120,000 IHT. And, if you can afford it, use your annual gift allowance of £3,000 (more if the gifts are paid out of normal income). Don’t forget insurance: second-death life insurance written in trust can go a long way to reducing the impact of IHT when a spouse or civil partner dies.
And, despite the 2006 Budget, trusts are still useful for the married, healthy and wealthy. How about an immediate transfer of £600,000 to two new discretionary trusts? But you must live for another seven years. Even with periodic and exit charges, that could mean an extra £240,000 to your children rather than the Treasury.
Finally, see a qualified specialist in IHT planning – not someone trying to sell an insurance-backed product but a solicitor or accountant specialising in succession planning. People still make homemade wills to save a few hundred pounds when they may end up paying thousands in IHT for lack of professional advice.
Alternatively – and pending a ruling on the Burden sisters’ anomaly – you can just wait for the IHT protest marches along Piccadilly. I fear it may be quite a long wait.
The author is a partner with Howell-Jones rhw
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Bank manager, solicitor and accountant crow with the same voice: It's your mother's tax, not yours!
This is not true! In September, I have to find £14K - the first installment of IHT due on a house under offer, but unsold, for 17 months .
Loss of my own home due to this is a very real threat.
Angela, Norwich,
Nell - can you please explain how you consider Inheritance Tax to be a tax on the living, when the amount to be paid is based on the assets of the Deceased?
Mike Bibby, St Albans, England -not EU
Inheritance tax is a crime, theft by tax on already taxed funds, and should be abolished.
People who work and save all their lives should have the absolute right to hand on what is left to their nearest and dearest without any penalty for being thrifty.
I agree with the author or this article in all respects except that he doesn't really suggest complete abolition.
Martyn, Alresford, UK
Neil, from Portsmouth
You sound like you would like some of my hard-earned estate when I die!
I come from good working class roots. I am a midwife, and work my socks off for my income. My husband comes from the same background and works in a power station. We have a 3 bed semi that is worth approx £250,000 which we struggle to afford - not too many luxuries for us (our choice, of course).
With end-of-life insurance, our estate will probably be worth more than £300,000.
I am now 45 & struggling to re-educate myself to change my career - a costly process! Neither my husband nor myself have ever "been privileged....our whole lives". We've worked hard and paid taxes on what we earn/have. Why should our assets not go in their entirety to our children? Why should the government tax us again on our assets when we have been taxed through the nose on everything already?
Deb, Merseyside, UK
Joyce and Sybil can resolve their problem by setting up an IOU DWT Will like any other cohabiting couple. They can own their house in 50/50 share and, when the 1st of them dies, place their 50% in Trust allowing the survivor to remain in the property during their lifetime. When the 2nd dies, then each 50/50 share passes to whoever they wish as specified in their respective Wills. Thereby each has used their ã300k IHT allowance - no European ruling required. I'd be delighted to help them set this up. I can be contacted via www.justwills-southwest.co.uk
Nick Hutt, Minehead, UK
My dear late Dad always threatened to take it with him - he insisted that he must have pockets sewn into his shroud.
This strategy would, of course, have failed because Gordon Brown ("Mr. Stealth Tax") would have opened up the coffin and helped himself to waht Brown would call 'Inheritance Tax'.
I'm certain that Brown has taken Inheritance Tax avoidance steps. I wonder if he has the decency to tell us what these are. Somehow I doubt that he is THAT decent.
Jimmy, Nottingham, England
"People from middle and upper class backgrounds have been privileged their whole lives and this reflects in their general life chances, they need or deserve this kind of windfall least of all."
What about those of society who are not in this ilk? Those you have worked to the bone of their fingers their entire lives, had to keep working after the "official" retirement ages because they still need to pay mortgages and bills and live? Those who because of inflation have found that the house they bought 20 years ago is now worth thousands over the threshold so that when they die all that they will own will have to be sold to get a disgusting £40 % of their lifetimes work just handed over to the tax man rather than their child/ren that they would dearly like to pass something on to because they will no longer be around for them in any other way?!
This situation is real, I am living it. As christians we pay our taxes, but even God arranged that his people were to inherit!
P, london, uk
If you abolish IHT, then what tax are you going to impose to make up the shortfall in revenue? Or what government spending are you going to cut? No article advocating IHT abolishment is worth its salt unless it gives answers to either or both of these questions.
Correct the anomalies, by all means, so as to prevent the necessity of selling the family home to pay IHT. Otherwise, as mentioned above, IHT is a good tax, since it is on unearned income and affects only the wealthiest in society. No one has a right to inherit wealth, it is simply their good fortune.
There will be no march on Westminster, simply because this tax affects only the well-off, and they have no moral stance against it, particularly if any substitute tax hit the less affluent.
BN, Cumbria
Brian Needham, Alston,
IHT is one of those taxes admired by those out side of its scope in the misunderstanding that the redistribution of wealth is in their interests. Those unfortunate enough to feel the grubby paws of the inland revenue casting their net over your parent's estate, find the whole exercise repugnant and invasive. It is typical of the Inland Revenue that they wait till an estate is at its most vulnerable, where the beneficiaries are at their emotional weakest to take their tithe. If I pay income tax, capital gains tax, value added tax etc.... other than some socialist anachronism, on what basis can any government justify a further bite of an already withered apple.
The real tragedy is that those with serious wealth have the resources to be able to avoid paying the tax, and it is generally those proud or shameful (depending on your view point) middle classes, struggling up the professional or corporate ladder, who get knocked back down to the ground for a good kicking when the die.
Sebastian Potiriadis, London, UK
Inheritance tax is not a 'death tax' for the obvious reason: you're dead - the IR would have a hard time making you cough up. Inheritance tax is a tax on the living for UNEARNED income. Surely that is the fundamental point. It also casts things in a rather different light than the inflammatory language used by this author.
I agree that the NRB should keep in line with the rise in housing prices to protect the typical/moderate family home and at the moment this is not the case.
However in principle IHT is one of the fairest, most socially redistributive taxes in existence. If it destroys wealthy landed estates then good!
If you are in a position to leave more than £300,000 to your nearest and dearest then you, and they, should consider themselves lucky.
People from middle and upper class backgrounds have been privileged their whole lives and this reflects in their general life chances, they need or deserve this kind of windfall least of all.
Nell, Portsmouth,
If you accept the necessity of taxation then surely the dead are a good place to start. I have yet to hear any complaints from them.
D Howell, Sandown, UK