Other countries show how the IHT could be made fairer
Inheritance tax (IHT) has often been voted one of the UK’s most hated taxes, despite the fact that it is only paid on the death of around 4% of the population . Many consider it outdated and unfair because it applies to money that has already been taxed at a time when families are most vulnerable.
It’s no surprise, then, that IHT’s £6.1bn revenue between April 2021 and March 2022 made headlines last week, as this was a 14% increase compared to the previous year and more than double the income from inheritance tax ten years ago. This is partly because the level above which IHT is paid has been stuck at £325,000 since 2009. To rub a knife in the wound, the government has said this threshold will be frozen until 2026 at the most early – despite high inflation – leading to the The Office for Budget Responsibility expects IHT’s annual revenue to reach £7.6billion by 2026.
Inequality in the UK has widened in recent years and redistribution is important for social mobility. But the problem with the current IHT setup in the UK is that the super rich can escape much of the burden by donating and taking advantage of some special business and land exemptions. According to a study by the Organization for Economic Co-operation and Development (OECD), the effective rate of IHT is only 10% of the wealth of people who died with £10m or more in the UK, compared to 17% of those with estate value. between £1 and £2 million.
Looking to other countries provides clues as to how the system could be made fairer. For starters, a progressive tax could help – an approach adopted by two-thirds of OECD countries. The range between them is wide, with Chile’s rate starting at 1% and Belgium reaching a maximum rate of 80%, but the rate paid is generally linked to the amount of money you have and your close connection to the deceased. .
The OECD has found that the effective tax rate (ETR) for most countries is below the lower end of the wealth distribution. But he singles out the UK and the US, which levy a flat rate of IHT, as the two countries where ETRs are falling on the largest domains. The United Kingdom and the United States, as well as Denmark, are also the only members of the rich country club to tax the estate of deceased donors rather than that of beneficiaries, with the OECD favoring the latter as a means of “promoting the equality of chances “. A crackdown on tax-relieved assets would also be likely to narrow the gap, as would the tightening of lifetime giving – currently excluded from IHT in the UK if the donor lives at least seven years after making the donation. Don.
In practice however, meaningful reform does not seem imminent as the changes would not be lucrative enough to be worth the political hassle. So familiarize yourself with the nuances of the UK scheme to help lower your potential IHT bill. But be sure to read the fine print. The telegraph reported that nearly 2,000 families have had to repay £600million over the past five years after being found guilty of breaking so-called ‘gifts with benefits’ laws. Examples include parents offering homes to their children and not paying market rents to continue living there.