In this episode, Michael Taylor and William Clouston discuss the Conservative Party’s proposals to abolish inheritance tax.
Inheritance tax is paid at 40% on assets over £325,000. The tax-free threshold is inherited by a surviving spouse and rises to £500,000 if the beneficiary is a child or grandchild, meaning that no tax is paid on the first £1m inherited by direct descendants of a married couple.
Over £7 billion per year is raised through inheritance tax, which is spent on public services.
The Conservative Party are said to be considering abolishing inheritance tax entirely as part of their next general election manifesto. Is it reasonable for parents to expect to build up wealth and pass it on tax-free, or would this simply entrench existing inequalities?
William and Michael explore the practical and ethical problems with this proposal.
My suggestion is to move to an accessions tax where individuals are given lifetime inheritance allowances of, say, £250k. This would include anything that they have inherited so far in their lives. Above the allowance, individuals would be taxed at a rate of 40% and they would declare what they have inherited in an annual tax return. When they make their first declaration, they would declare all historical inheritances, large capital transfers and gifts.
One option is to retain Inheritance Tax as an ‘Advance Accessions Tax’ applied at 40% on an entire estate, with beneficiaries using their annual tax return to reclaim the 40% tax, if they have qualifying inheritance allowance available.
The benefit of this reform would be encouraging redistribution through people’s own decisions to spread their estates to multiple beneficiaries, with the option to prioritise people who have not inherited much before. Special provision would be made to allow genuine family businesses to be passed on as going concerns, with taxation deferred until future sale.