Conal Gregory: Chancellor’s chance to ditch tax that hits prudent Middle Britain hardest

LAST week, a Government think-tank proposed that inheritance tax should be drastically altered by removing most of the allowances.

It was right to publicise the bewildering complexity but its plans would seriously hurt the prudent and it missed the opportunity to recommend scrapping the tax altogether.

The Conservatives entered the last general election pledging to ease the burden of inheritance tax. George Osborne, now Chancellor, assured voters he would raise the threshold (currently £325,000) to £1m. He was stopped by the Liberal Democrats in the coalition, which many consider a high price to have paid.

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The Office of Tax Simplification (OTS) sounds straight out of George Orwell. In fact, it was set up last year by Osborne to examine the UK’s increasingly complex tax system and to make recommendations. In examining inheritance tax, it found no less than 89 different forms of tax relief, which help to justify the fees raised by specialist accountants and tax advisors.

Clearly the reliefs are in need of review. For instance, the annual limit for “exempt gifts” – the amount someone can give away each year to a specific person – has remained unchanged at £3,000 since 1981. Today it would be worth almost £6,000. Inheritance tax is a charge on the prudent and essentially middle Britain. The poor need not consider it. The rich make careful arrangements to ensure the next generation reap their proper inheritance. This can be achieved by transferring money and assets without changing their living standards.

Instead the tax is levied on those who save – perhaps even using tax-exempt schemes like ISAs (which come into an estate on death) – purchase their home and plan sensibly for retirement. Many never expected to pay 40 per cent on the careful provision they had made. This is because rising property prices have pulled thousands into inheritance tax.

The OTS would scrap trust funds, established by many parents and grandparents to help their offspring through education. With professional help, so-called “bare” trusts have been established to protect money and ensure youngsters do not gain premature access to wealth built up often over several lifetimes

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In looking at tax reliefs, not just those related to inheritance, the OTS is providing a public service. They found a staggering 1,042 allowances including many that have long since served their initial purpose, like the 15p daily limit for luncheon vouchers which was given in the post Second World War days of the workplace canteen.

Similarly, few realise that miners can still claim for coal. It says 47 allowances cost the Treasury more in “administrative burden” than the benefit to the claimants.

Some obscure reliefs are destined to just make life sensible, such as not incurring gambling duty if cards are played at home.

Others may be designed to help in “one-off” events, such as to provide small sums upon marriage, which are in decreasing amounts for own offspring, then to grandchildren and finally non-relatives. Tax planning here has become far too complicated with few understanding the detailed arrangements and the necessity to undo and redo such schemes. There are discretionary trusts, interest in possession trusts, life interest trusts, bereaved minor’s trusts, “18 to 25” trusts and disabled trusts to name just six.

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Providing a crystal ball forward seven years is not easy, particularly with family changes.

This is without also considering the capital gains tax implications when assets are transferred. Sensibly the OTS did acknowledge that inheritance tax and CGT considerations would need to be taken together.

Yet on inheritance tax, the OTS has missed an opportunity. The UK does not actually have such a tax. It is de facto an estate tax, as also occurs in Belgium, Denmark and France. Estate taxes are designed with the deceased as the tax subject, while inheritance taxes focus on the heirs.

A leaf could be taken out of Portugal’s book which imposes a flat 10 per cent stamp duty on assets transferred on death but an exemption means no tax arises when such heirs are the beneficiaries of the estate.

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Family ownership of a business asset upon death is widely recognised by many EU states, notably in Belgium, Germany, Italy, Netherlands and Poland. Tax rates may also favour the closest to the deceased with three tiers in Germany, ranging from seven per cent for spouses, children, stepchildren, grandchildren, great grandchildren, parents and grandparents up to a maximum 50 per cent for non-related. Instead Chancellor Osborne should be bold at his budget on March 23. He should return to his Conservative roots and announce the end to inheritance tax, bringing the UK into line with Austria, Cyprus, Malta, Portugal and Sweden among other countries that have neither estate nor inheritance taxes.

The alternative will be the rise of yet more SKIERS – the marketing acronym for parents who prefer to Spend the Kids Inheritance. The grey market is just as likely to cruise to the Antarctic as to go bungee jumping, and then there will be no money pot left for the Treasury to tax.

Read Conal Gregory every Saturday in the Yorkshire Post.

Conal Gregory is the Yorkshire Post’s personal finance correspondent.

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