‘Replace IHT with a tax on expensive gifts’

4:02 pm - December 26th 2010

by Newswire    

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Inheritance Tax should be abolished and replaced with a new tax on gifts to individuals over £150,000, according to a new report from ippr.

The report argues that Inheritance Tax is no longer worth defending in the face of declining revenues and public hostility, and that there is a strong case for replacing it with a progressive Capital Receipts Tax on cash and non-cash gifts.

This would stop tax avoidance by the super rich and reduce wealth inequalities in Britain.

ippr wants to see a Capital Receipts Tax on gifts worth over £150,000 with a band system to tax bigger gifts at higher amounts, up to a maximum of 40 percent:

  • gifts between £150,000 and £300,000 would be taxed at 20%
  • gifts between £300,000 and £450,000 would be taxed at 30%
  • gifts over £450,000 would be taxed at 40%
  • gifts between married or civil partnered couples would be completely exempt.

ippr’s report argues that the tax reform would:

  • be a direct contribution to reducing wealth inequality,
  • promote a wider distribution of wealth by creating an incentive for a wider disbursement of estates so as to limit beneficiaries’ tax bills,
  • remove the ability of the very wealthy to dispose of some of their assets during their lifetime.

A Capital Receipts Tax on gifts above £150,000 would raise £1 billion more revenue than Inheritance Tax does now. ippr’s report argues that the extra funds could be used to expand free nursery education to promote social mobility.

The tax reform would raise enough to offer a free nursery place to the poorest two thirds of families when their child reaches the age of two.

Nick Pearce, ippr Director, said:

A Capital Receipts Tax on gifts above £150,000 would raise £1 billion more revenue than Inheritance Tax does now and would be a fairer means of increasing equality of opportunity. It would spread wealth better across the generations, by incentivising families to pass on their wealth to a greater number of children and grandchildren.

The proceeds of a switch from Inheritance Tax to a Capital Receipts Tax could be used to fund an expansion of free nursery education, a key driver of social mobility. This would be the best way of passing on opportunity, not privilege, from one generation to the next.

Inheritance Tax is paid at a rate of 40% of the value of the estate above the £325,000 threshold.

Because tax is paid only on the value of the estate above the threshold, the average, or effective, tax rate is always less than 40%. An estate of £1 million, for example, will pay £270,000, an effective tax rate of 27%.

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Reader comments

” • gifts between married or civil partnered couples would be completely exempt.”
Isn’t that precisely the basis of Philip Green’s tax avoidance strategy?

It’s not a gift, my super rich uncle paid me as a consultant for a year…

The trick would to make all taxes follow the same bands and amounts, so there would be now point in dodging it. Tax higher on things that are too easy to make money from, selling / renting property for example .

A property tax would be much easier to enforce and an effective way to discourage misallocation of land but we couldn’t do that because ‘Oh noes, the “Squeezed Middle” would complain’.

This idea is essentially a way to redistribute wealth from the rich to their accountants. Isn’t IPPR supported by some fairly big accountancy firms?

I’ve never understood the hostility towards inheritance tax. When is the one time when you don’t need money? When you’re dead. The children of the rich (and I admit I’m one of them) get enough advantage as it is. Why should they (I) even further benefit when parents die, when the proceeds could be more fairly shared amongst those who need it?

£325,000 isn’t really rich is it? The value of life insurance, a house and some savings will gave beyond that pretty quickly. By that token the majority of the country are ‘rich’ and that makes the redistributive ideas of inheritance tax a bit silly. I suppose that with this idea then the individual amounts would be taxed – at the moment you can have four kids who each only get just over £80,000 each of tax free inheritance (and will have to sell the family home to pay for it), whereas under this system they will get more of a tax free amount.

I’m not sure why money should be taxed that is essentially a net of tax amount anyway.

6. George McLean

This will be helpful if it starts a review of tax, to include an exploration of land value tax.

@4 Presumably, if you’ve been miserly enough throughout your life that that the only way your children get to share in your wealth is when it’s prised from your cold dead fingers, the last thing you want is for the tax man to take a large slice for himself.

Ian: £325,000 isn’t really rich is it? The value of life insurance, a house and some savings will gave beyond that pretty quickly.

If you own the house outright rather than having most of its value on a mortgage, and if you didn’t spend large parts of your life insurance and savings funding your retirement, and if indeed you even own a house at all rather than renting.

HMRC figures suggest that, adjusting for inflation, around 90% of people die without that much in net assets. A tax that transfers from the richest 10% of dead people seems fairly redistributive.

@5 – total bollox; and besides which, under the current rules it’s effectively £650,000 for married couples (or civil partners).

In my opinion IHT should be charged on an individual basis and the threshold should be £100,000. According to the HMRC data (see @8), this would affect one in every four people.


you missed a part of that explanation

It’s not a gift, my super rich uncle paid me as a consultant to his cayman islands business for a year.

Utterly ridiculous proposal anyway – given how easy it would be to avoid. And besides – if this is a good idea – why do it instead of IH? Surely doing this and using it to cut VAT would be a “fairer” thing to do?

Mmm, another thorny tax issue..
A flat tax on all income would solve this. Doesn’t matter if its inheritance, a gift or disguised as income or capital gains it would all be taxed at one rate (that rate being more reasonable since the tax base is wider)
I realise a flat tax is an anathema to not so progressive – ‘progressives’ but when you look carefully there are many merits, one of the most important being that it minimises the avoidance schemes that the super rich are so adept at using, which makes ‘flat tax’ more progressive than it might seem on initial inspection.

12. Chaise Guevara

11 Leon

“I realise a flat tax is an anathema to not so progressive – ‘progressives’ but when you look carefully there are many merits, one of the most important being that it minimises the avoidance schemes that the super rich are so adept at using, which makes ‘flat tax’ more progressive than it might seem on initial inspection.”

Well, yes. We’d minimise tax avoidance using a mechanism that would involve charging the rich far less (or the poor far more) than beforehand. So we could make happy noises about fighting corruption while the money vanished from the coffers.

Talk about taking a hammer to crack a nut.


Again – in line with my other comment – why does one solution result in two?

You are spot on that it would make sense to tax all income as income – instead of treating different incomes differently (with IHT, Capital Gains Tax and income tax to name just three).

So just have income tax and all is better.

What doesn’t make sense is how that leads you to think it could only be done with a flat tax?

Surely we could sensible tax all income the same way – but like income tax at present, scale it in such as way as to ensure the rich pay proportionally more and the poor pay less.

So why add in a flat tax as part of your suggestion? If a flat tax was fair it would have its own merit instead of piggy backing on unrelated good ideas.

Having just gone though a breavement, it is horrible, having lost someone close to you, to have the taxman grilling you over family possessions such as jewellery, antiques.

Other countries have abolished IHT, Australia for one.
The UK should do the same.


Tax avoidance is no nut. Vast amounts of potential revenue are being lost to avoidance and evasion and a radical rethink is required.( I haven’t got time to verify this right now but I am under the impression that the money lost to avoidance/evasion is greater than the additional marginal revenue gained from the upper bands of tax). Constant tinkering with the system isn’t going to rectify it, if anything has been proven so far, it’s that.

This problem is characterised by two separate but related issues. One is the rate of taxation the other is the complexity of the system.
Progressive rates ensure that there is a disproportionate improvement in the return on evading/avoiding tax in your higher income bands rather than at your standard rates, indeed every time you increase tax rates you increase the motivation to evade/avoid. This ensures that the higher earners who can afford the taxation specialists get a handsome return on the risks they take in avoiding/evading tax. The returns on whatever risks you take in this area outweigh any other ‘investment’ you could make and certainly make a mockery of Joe Average’s carefully constructed pile of ISA’s.

The complexity of the system provides the opportunity for avoidance and camouflage for evasion. Over the years an incredible infrastructure has been built up in the grey areas surrounding taxation law. While an individual tax payer or company may initially approach the whole area with some degree of trepidation they soon find out taxation specialists, banks and tax havens are vigourously competing for their business and have dreamt up fascinatingly complex schemes that take years for the revenue to unpick if they can at all. All you have to do is ensure that you are seen to have a taxable income that covers your visible lifestyle. Anything above this can be squirrelled away in these schemes or be used to finance your ‘invisible’ lifestyle.

While it may be interesting to analyse the two issues separately I suggest that doing so is about as illuminating as say analysing a knife and fork separately, or motivation and ability separately. The most meaningful analysis can only come about by seeing how the two components interact cumulatively together. Cutting to the chase I propose that any meaningful reform of the tax system must tackle both issues together.

While most are happy to concede simplification of the tax system they don’t wish to concede flattening the bands because it seems unfair and this is quite understandable because that flat tax increases tax take is somewhat counter intuitive although there are numerous precedents that bode well for that outcome.

The first bone of contention would be that I would suggest the base point for analysis should be what people actually pay in tax relative to their actual incomes rather than what they should pay compared to their declared incomes. Using this as the base point you will find that the rich and super rich pay about the same proportion of their income in tax as the poor i.e. very little. Being a PAYE employee in the middle or upper middle is the worst possible position to be in (or the best if paying tax makes you feel good).The ‘progressive’ system is a sham and for the rich in terms of actual tax paid against the real income earned is most properly described as a regressive system.

The second point shouldn’t be more contentious but often is. I think that the objective of tax reform should be to increase the total tax take. I think that it is most important that the system is effective in achieving this and think that fairness is a valid but secondary concern. But more of this later.

Moving from the base point to the objective there are three main alternative strategies:
a, keep progressive bands but simplify the system to the point where avoidance/evasion are impossible. This leaves the rich with the strongest motivation to evade but no opportunity to do so. What do you do if you are rich and suddenly hit with the prospect of paying progressive tax on your real income?You either stop earning because your incentive has been reduced or you migrate, either way the national tax take decreases. The latter may sound extreme but if there is a significant difference between what you do pay and what you should pay then migration would be a very reasonable option.
b, flatten tax but maintain the complexity of the system. This lowers the motivation to evade/ avoid but retains the opportunity. Would probably still result in an increase in the overall tax take as has happened in many countries when top marginal tax rates have been reigned in.
c,flatten tax and simplify the system to the point where avoidance /evasion is impossible. This results in a lower motivation to evade/avoid and no opportunity to do so. This means a significant increase in the overall tax take because of minimal losses to evasion / avoidance. Some of the rich would migrate but significantly fewer than in option a.

Returning to taxation fairness, to save unnecessary argument I will say that protecting the poor from taxation would be sufficient to satisfy the fairness condition and under the typical provisions of a ‘flat tax’ system everyone benefits from a strong base of untaxed income ( which should be carefully calculated to tie in with benefit levels and the marginal rate of benefit withdrawal). Therefore a well designed flat tax system can be strongly progressive at the lower rates of income rather than regressive at it is at present with intolerably high marginal rates of benefit withdrawal.

This means that the flat tax system is theoretically and practically a progressive taxation system over the critical span of lower incomes. Over higher incomes it is theoretically flat (no prizes for that) but most importantly it is practically progressive relative to the system that exists at present because the rich would be paying a flat rate rather than the regressive rate they actually pay at the moment (rendering it effectively progressive). I restate my original assertion.. a flat tax is actually more progressive than it originally seems on initial inspection.

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  1. Liberal Conspiracy

    'Replace IHT with a tax on expensive gifts' http://bit.ly/fKkbXW

  2. David T Breaker

    “@libcon: 'Replace IHT with a tax on expensive gifts' http://bit.ly/fKkbXW” < This is just a money grab. IHT by another name but higher!

  3. mareecia buffington

    'Replace IHT with a tax on expensive gifts' | Liberal Conspiracy: A Capital Receipts Tax on gifts above £150000 … http://bit.ly/dGx1ff

  4. spsot

    RT @libcon: 'Replace IHT with a tax on expensive gifts' http://bit.ly/fKkbXW

  5. Rachel Hubbard

    Replace IHT with a tax on expensive gifts | Liberal Conspiracy: http://bit.ly/e0NqU8 via @addthis

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