“There is nothing as certain as death and taxes.” Or to put a modern spin on it, “none of us is getting out of here alive, so make sure to pay the right tax bill, when you leave”. In the same context, 2017 has prompted a report by the Institute for Fiscal Studies on inheritances and inequality across and within generations. The authors of the report have flagged up a change in society whereby today’s elderly have much more wealth to bequeath than their predecessors, primarily as the result of rising home ownership rates and rising house prices.
The anomaly is that younger generations now find it harder to accumulate wealth of their own, than previous generations did. This is, in no small part, due to the fact that the younger generation finds it harder to find a foothold on the property market. For those lucky enough, there may be the prospect of an inheritance, but the evidence suggests that it is the already high income individuals that are around twice as likely as low income individuals to inherit something. One of the headline statistics is that the top half of households where all members are 80 or older hold 90% of the wealth, and the top 10% hold 40% of the wealth. Hence a “lucky half” of younger households look likely to get the vast majority of the inherited wealth from the older generation. Among those born in the 1970s, for example, 87% of those in the top income bracket have received or expect to receive an inheritance.
Traditionally, inheritance tax has been thought of as a tool to help redistribute wealth and address inequalities. Modern inheritance tax in the UK dates back to 1894 when the Liberal government introduced an estate duty in its policy to try to pay off the £4m deficit of that era. Today’s deficit is, of course, more eye-watering and yet, in April this year, a new inheritance tax exemption kicks in, which will gradually increase from £100,000 to £175,000 per person by 2020/2021, effectively raising the total inheritance tax exemption to £500,000 per person. Where married couples jointly own a family home and want to leave this to their children, their exemption could be as much as £1m. The rules contain some restrictive conditions and, in many cases, it will not be enough to rely on the headlines without understanding the underlying qualifications which attach to rules, in order to take advantage of them.
Last year, the Chancellor also abolished the 55% charge on defined benefit pension funds on death. This is a significant new relief for anyone lucky enough to have built up a significant pension pot, which can now be inherited, tax-free, by a family member on death, albeit with some planning.
Inheritance tax concessions for relatively wealthy individuals might, to some, seem ill timed. However, in terms of UK tax revenue, inheritance tax counts for a relatively small proportion of overall tax takings. Generous inheritance tax exemptions are already available and there can be good reasons for that. In the UK, for example, where there is a family business or a farming operation, the assets are likely to enjoy relief from inheritance tax where, otherwise, the impact of a 40% inheritance tax charge would threaten the survival of the business or farming operation.
And elsewhere in Europe, death duties are even more relaxed, compared to other forms of taxation. For example, in 2004 the Swedish Parliament voted unanimously to abolish inheritance tax. This was prompted, in particular, by the struggle which family businesses had in surviving from one generation to the next, as a result of the inheritance tax burden. Reportedly, business owners such as the founder of IKEA and Tetra Pak had chosen to emigrate, mainly due to the prior Swedish tax policy, until the inheritance tax was abolished.
It is fair to say that for many of Scotland’s middle class, where the family home is the primary asset, the April 2017 inheritance tax changes will be a welcome relief, provided that the taxpayer has a suitable Will in place to make sure they take full advantage of the relief. It may also help to swell the numbers of the younger generation who can afford to take their first step on the property ladder, following a greater family inheritance.
Hypothetically, if Scotland were to have the power to set its own agenda for inheritance tax and influence the distribution of wealth on death, would it follow in the steps of its close neighbour Sweden? Let us see how it deals with devolved income tax first.