A ham-fisted inheritance tax grab on the middle class would end in tears

Times

3 days ago

Surely the government could not be so unwise as to target Middle Britain with an inheritance tax raid on money given to your nearest and dearest?
Yet here we are, with the chancellor now reported to be considering a crackdown on lifetime gifts, which presumably could cover anything from extending the seven-year tax-free rule to scrapping the exemption that allows unlimited gifts made from your 'surplus income'.
This could be an unwelcome resurrection of the capital transfer tax that Labour introduced in 1974, and that Nigel Lawson duly replaced with inheritance tax and the seven-year rule. The return of such a policy would hit the Bank of Mum and Dad hard and stop thousands of young buyers from getting on the property ladder.
Aggressively going after family wealth seems like an odd thing to even consider; it would raise relatively little and would be deeply unpopular.
Before every budget the Treasury will present the chancellor with all sorts of cost-cutting scenarios, many of which won't actually be considered. However, this year we cannot rule anything out. And we also now know that Rachel Reeves has a £50 billion black hole to fill with our cash.
Many cannot understand why inheritance tax is consistently ranked as the most-hated tax in Britain when it affects relatively few people — about 1 in 20 estates pay it every year.
But let's not forget that behind every estate noted in that government data is a family of brothers and sisters, sons and daughters, and grandchildren. The true impact is far greater than the official statistics suggest.
• Britain pays record £5bn in inheritance tax
The grief caused by the threat of inheritance tax is also never recognised in the stats. To avoid an unnecessary bill for their loved ones, the older generation are often forced to employ accountants and advisers in their twilight years to work out a strategy to ensure that their hard-earned money can stay in the family.
The very wealthiest already know how to pay as little inheritance tax as possible. As a wealth tax, it has a lot of holes.
However, a series of chancellors have now exploited fiscal drag, through the freezing of the tax-free allowances, to turn inheritance tax into something that, quite frankly, most middle-class families now need to worry about.
Reeves has already extended the freeze on inheritance tax thresholds for two years up to 2030, as well as throwing the value of unspent pension pots into the mix, which in turn will push many, many more into paying the death tax.
• Surge in families caught out by inheritance tax
If you die owning an average semi-detached home in the southeast of England and have decent pension savings, your family are now likely to get a bill.
HM Revenue & Customs this week also confirmed that even the pensions of those who die before retirement will be liable for inheritance tax. The scope of this tax is changing all the time, and it's never in our favour.
The inheritance tax nil-rate band has been £325,000 since 2009, and the extra allowance for leaving a family home to a direct relative has been fixed at £175,000 since 2020 (on estates worth less than £2 million). This is all despite inflation soaring and property prices booming.
Putting aside all that, inheritance tax is distasteful to many. It's levied at the worst time for families and is seen to be just another excuse to claw back money that has been earned with income tax already deducted.
What's more, delays to probate mean that many families are having to pay the bill before they get their hands on the estate, and if they miss the six-month deadline they face a punishing interest rate of 8 per cent.
Finally, our 40 per cent rate of inheritance tax is one of the highest in the world.
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Quite often, politicians learn about the Laffer Curve the hard way and before it's too late; it shows that increasing taxes can, and often does, lead to a drop in revenue. Jeremy Hunt's heavy-handed cuts to the capital gains tax allowance led to receipts falling by more than £2 billion a year.
You cannot stop people from dying, but you can take action to ensure that not a penny of your estate is caught in the tax net. Whatever the taxman throws at families, they will resentfully find a way to beat it.
In 21st century Britain, thanks to the Treasury's addiction to fiscal drag, inheritance tax is no longer a levy on the very richest, but a penalty on the unaware and the unprepared.
We should not forget that it is not the government's job to redistribute wealth. We need incentives to put our money into the economy, rather than sheltering it from the taxman.
The inheritance tax regime doesn't need toughening up. It needs simplifying and resetting. A far smarter move would be to heavily reduce the headline rate and get rid of the complex web of exemptions and allowances. An opportunistic tax grab on family money would be economically unwise and a giant political folly.