IPPR calls for inheritance tax to be abolished

A think tank is calling for inheritance tax to be abolished as part of a set of proposals for major reform to the UK tax system.

The Institute for Public Policy Research (IPPR) published its 10-part plan for economic reform, which includes replacing the system of inheritance tax with a new ‘lifetime gifts tax’.

When do I pay inheritance tax?

Under current rules, inheritance tax applies to the estate of a person who has died, if it is worth more than the £325,000 threshold.

The IPPR’s proposed tax would instead be levied on the individual receiving the gift. It would apply to all gifts received throughout a person’s life, above a proposed lifetime allowance of £125,000.

All further gifts above this threshold would be classed as income for that financial year and taxed at income tax rates. The IPPR estimates this would raise an additional £9 billion a year in tax.

How much is inheritance tax?

This tax is set at 40% of any value over the £325,000 threshold. This is reduced to 36% if more than 10% of the estate is given to charity.

Sean McCann, chartered financial planner at NFU Mutual, commented:

“Changes to inheritance tax are long overdue. It’s a fiendishly complex and deeply unpopular tax, and it’s clear that we need a much simpler set of rules that are easier to understand.”

He continued:

“Replacing the current system, where tax is levied on what we leave behind, with a tax on the recipient would be easier to understand and administer.”

In addition, the report calls for reform to the varying taxation of different sources of income, which it says “creates distorting economic incentives and is not transparent”. It proposed that marginal tax bands should be scrapped in favour of a formula-based system where the rate would rise according to each taxpayer’s level of income.

The report also recommended replacing the system of rates and allowances for employee national insurance contributions and income tax with a single rate on all forms of income.

Capital gains tax and separate rates for dividends would be abolished under this system, with income from these sources instead incorporated into a single tax schedule. The exemption for capital gains on first homes would however remain.