Nobody likes paying tax. But it is through tax that our public services, our health system, our defence, our transport and much more are paid for.
So, taxation is (sometimes begrudgingly) accepted when it is seen as being fair. We may have quibbles over rates and what specific parts of our system attract tax – but the principles of most taxes are accepted. All apart from one tax which seems to be unpopular amongst everyone – even those unlikely to ever have to pay it. This is Inheritance Tax.
It is disliked by those passing on assets, it is disliked by those inheriting assets – and it is disliked by those doing neither.
Part of the reason for this is undoubtedly not just the tax itself, but the massive bureaucracy that is involved in the tax that means it is widely believed (with good reason) that it is a tax avoided by the super-wealthy and incurred by those moderately well off who have done the right thing by saving all their lives.
In the UK there are around 590,000 deaths on average, each year. Of these, 275,500 estates are required to undergo the time-consuming business of submitting Tax Returns – from which only 24,500 actually pay the tax (or 5% of all estates). This is a hugely over-administered tax.
It is also, in the great scheme of things, a relatively under-yielding tax. Despite the effort required in its submission and collection, it brings in a relatively small £5.4 billion. Enough that the tax can’t be scrapped, but really relatively little compared to other simpler and fairer taxes.
Furthermore, the tax does not consider inheritance and asset transfer that occurs during a lifetime. Despite what has to be the transfer of assets worth many billions, very little is known about when and what is being transferred outside of probate.
It was with these issues in mind that the APPG for Inheritance Tax and Intergenerational Fairness, of which I am the Chair, published a report offering a radical replacement to the tax – namely, a flat rate gift tax.
This proposal would scrap all exemptions/reliefs other than spouse and charity, it would remove the need of the 7 year rule, the reservation of benefit rules, potentially exempt transfer rules and remove a huge amount of regulation from our tax code in a stroke.
In addition, it would mean the removal of the CGT uplift on death and instead introduce a 10% flat rate tax on gifts, lifetime gifts and on death.
The work of lawyers and accountants would be vastly reduced, the tax code would be substantially improved, and I believe the incentive to avoid the tax would fall away. It would undoubtedly simplify the whole system and introduce a higher degree of fairness and acceptance.
But the question that really matters to the Treasury is: would it actually raise more tax?
Reforms to Corporation Tax have seen the removal of exemptions and relief combined with a lower rate – and this has actually increased tax take.
Given that a flat rate gift tax would be applied to lifetime gifts in a way that it hasn’t to date, the fact that there would be a huge simplification of the process, and that there would be the removal of exemptions and relief with a rate of tax with less incentive to avoid, I do think that the tax could equal the present tax take – if not exceed it!
The details (including the actual rate) of such a tax are all up for argument. But I do hope that ahead of the upcoming autumn Budget, this report will start a conversation about not just tinkering with inheritance tax but replacing it completely.
It is often said that the only two certainties in life are death and taxes – that may be true, but they don’t necessarily have to happen at the same time.
John Stevenson, Conservative MP for Carlisle and Chair of the APPG for Inheritance and Inter-Generational Fairness