Tax Break

John Fisher, international tax consultant

Archive for the tag “Inheritance tax”

Dead Wrong

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April fool!

It’s bad enough that, thanks to the controversy surrounding Brexit, the average Briton no longer lives with peace of mind. From April 1 they will no longer die with peace of mind.

A headline-grabbing exaggeration perhaps, but probate fees for opening a file to deal with a deceased person’s estate are due to jump from £155 to, in some cases, £6000 from next week. While the government insists it is a fee – in order to avoid a legal requirement to include it in the annual Finance Act – the Office for Budget Responsibility announced on March 15 that it would be included, alongside Inheritance Tax, as a tax for statistical purposes.

Her Majesty’s Revenue and Customs  has been administering the controversial – and widely hated – Inheritance Tax since its inception in 1986.

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The Twilight Zone?

As in other countries imposing an Estate Tax or Inheritance Tax (there are many that have either cancelled or never adopted either) UK Inheritance Tax is  controversial for the wrong reasons. It is argued that it represents a double tax on already-taxed income, while at the same time not bringing in much revenue (other than from the good dead people of Guildford, the recently crowned inheritance tax capital of Britain). The first argument cries out for a different spin, and the second (it represents around 1% of tax-take) may anyway cease to be valid in the years ahead.

As taxes go, an Inheritance Tax makes a lot more sense than an Estate Tax.

An Estate Tax imposes tax on the estate of a dead person – beneficiaries receive what is due to them out of the post-tax value of the estate. There is, unquestionably, an element of double tax (although the likes of Thomas Jefferson and liberal philosopher John Stuart Mill gave the finger to that), and the fact that estate tax planning is entirely within the bailiwick of the donor (subsequently the ‘dead person’) such tax can often be minimized.

An Inheritance Tax imposes tax on the beneficiaries. In that case, the double tax argument is weakened – the dead person passes on their estate free of tax (but without a tax deduction for the transfer as they, rather than society, decide who is to receive it) and the beneficiaries – similar to the winner of a lottery – pay taxes on their windfall. As regards the level of collections, imposing tax on the beneficiaries also puts something of a spanner in the works of aggressive tax planning during the donor’s lifetime.

There are two types of inheritance tax  – accessions and inclusion. An accessions tax system provides the beneficiary with their lifetime tax-free inheritance threshold, and hits them with the prescribed rate of inheritance tax on  the balance of what they receive from any number of donors, while an inclusion tax  charges beneficiaries according to their marginal income tax rates  (plus an inheritance surcharge). While inheritance tax is always fairer than estate tax, the inclusion tax system is the fairest of them all – as it clearly works in favour of beneficiaries of smaller amounts and/or lower income.

Furthermore, in all cases (Estate Tax and both types of Inheritance Tax), the increased exchange of information between tax authorities mean it is increasingly difficult to hide assets ‘abroad’ – which should also substantially serve to increase the revenue collection.

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‘More tea, guv?’

Britain claims to have an Inheritance Tax. The problem is that – to all intents and purposes – no, it doesn’t. It has an Estate Tax. The government website (Gov.UK sounds like an initiative of the Kray Twins) talks to the donor. Other than in specific circumstances the tax is claimed from the estate. The tax-free threshold is given to the estate – and even in the case where specific gifts are given outside the will in the 7 years prior to death, they get first benefit of the tax-free amount. And the tax rate is fixed.

So, why is it called an Inheritance Tax?  We shouldn’t complain. At least it is called a ‘tax’ as opposed to the Probate Fee, which is a tax but the government can’t afford to call it that. And what about Her Majesty’s Revenue and Customs?  Isn’t it a tax authority?

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At least they still call it a ‘tax’ return

Perhaps we shouldn’t ask too many difficult questions of a country with a tax year-end of April 5th.

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