Inheritance tax needs a rethink to make it fairer
◆ More and more people will be affected by this iniquitous levy as house prices continue to increase, writes David Alexander
Prior to last week’s Budget there was speculation that Chancellor Jeremy Hunt would be looking at revising the rules and thresholds for Inheritance Trax (IHT). As it happens, he didn’t review the overall system, but the statement did contain a single line on slightly changing the rules to enable beneficiaries the opportunity to apply for a grant on credit.
Most people do not realise that IHT has to be paid prior to confirmation (probate in England) of the estate and funds cannot be freed until the tax bill has been paid. Given that most people’s principal asset is their home it is odd that distressed relatives are asked to pay a bill before the estate is settled and often without any obvious means of doing so.
Prior to the Budget the beneficiaries of an estate had to prove that “they have made every practical effort to raise the money” to pay the tax before accessing a government grant. This would include taking out a personal loan which would be charged interest. Until the Budget announcement a ‘grant on credit’ from HMRC has only been agreed in ‘exceptional circumstances’.
This has led to many people being trapped while dealing with an estate where they cannot pay the IHT due because they don’t have the money and cannot access the funds in the estate without first paying the tax. Added to this is that HMRC charges 7.75 per cent interest on all outstanding IHT from the moment the person dies until the tax is settled.
However, following the Budget, from 1 April those settling an estate will no longer need to have sought commercial loans before applying for a ‘grant on credit’. Instead, they will now be able to apply to HMRC for a grant on credit which is more likely to be approved. For those dealing with an estate beyond this date this should resolve some of the financial strains. For those already dealing with an estate they may find they remain trapped with a rising tax bill and an asset they can’t access.
While this resolves one issue the whole system of IHT remains problematic. You are taxing someone in death on money they have already been taxed on in life, leaving relatives to pick up the pieces. While many believe that IHT applies only to the very rich it is, in fact, becoming much more common as house prices push more individuals beyond the threshold which has remained frozen at £325,000 since 2009/10 and will remain at this level until 2028, by which time 7 per cent of all estates will be affected.
With the average price of every home in Edinburgh and East Lothian now valued at more than £325,000 it is clear that many more ordinary individuals and families will be affected by this tax in the future.
Given that the tax is set at 40 per cent on all estates valued above the threshold this will become a growing problem. The argument that it only affects the rich is incorrect. The rich will have advisers to ensure they escape their full liability, and it will be those with estates valued over £325,000 but without access to specialist advice who will end up paying the most. The next government should look at this iniquitous tax and review it to improve fairness and justice for individuals and families who are being punished for working hard, accumulating wealth, and wanting to transfer this to the next generation.