Last month several newspapers reported plans by the Labour Party to end inheritance tax and replace it with a gifts tax.
The coverage was somewhat creative, as the idea was plucked from a paper prepared for the Labour Party primarily focused on reforming the taxation of land. The gifts tax section covered just half a page and did little more than revamp a proposal from over a year ago by the Institute for Public Policy Research (IPPR).
These proposals are not yet Labour Party policy –they will only be considered when the party prepares its manifesto for the next election, which could be as far away as 2022. However, it’s still worth considering how inheritance tax might be transformed into a gifts tax.
The major change proposed is that liability would shift to the recipient of a gift or legacy, not the person making the gift or bequest. This approach is common in other countries which levy estate taxes. The IPPR framework would make gifts and bequests totalling £125,000 (indexed to inflation) over a lifetime free of tax. Beyond that threshold, any amount received would be treated as income and taxed accordingly. The new tax would apparently raise almost three times as much as inheritance tax. The paper on land tax reform added one tweak to the IPPR proposals: a new tax on equity release which it described as a “key means of avoiding inheritance tax”.
Inheritance tax is generally regarded as the UK’s most hated tax, despite the relatively few estates that end up paying it. However, it is much easier to sidestep than a lifetime gifts tax would be. Under inheritance tax, the general principle is that outright gifts only enter into the calculation if they are made within seven years of death.
If the impact of inheritance tax on what your family or other beneficiaries will receive concerns you, now could be a good time to discuss with us the ways in which you can take advantage of the generous treatment of lifetime gifts…while it lasts.