The Government has been urged to bin a key inheritance tax (IHT) rule that would mean Britons would pay up to £140,000 more when inheriting a home.
Fiona Dodd, private client partner at Mayo Wynne Baxter, told Express.co.uk the Government should “remove” the residence nil rate band (RNRB) policy.
She said: “This is simply a political sop to conservative voters who love a ‘hard-working family’ and plays into the ‘Englishman’s home is his castle’ cliché.”
The band applies when a direct descendant inherits a property that was the main residence of the deceased.
It provides an extra allowance of up to £175,000 before a person pays IHT when inheriting from an individual, or up to £350,000 when inheriting from a couple.
The successor pays a standard 40 percent IHT rate on any total inherited assets above these allowances.
So if the RNRB was scrapped, an inheritor would pay up to £70,000 more when inheriting assets from a single person or up to £140,000 more if inheriting from a couple.
Other analysts think the RNRB policy is proportionate. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said the RNRB has been important in protecting families from being hit by IHT bills.
She commented: “We’ve seen enormous house price inflation in recent years which means many people may be accruing a liability without even realising it which can leave their families with a big bill that they haven’t prepared for.
“Removing the residential nil rate band would only mean more people get hit. We need to see thresholds that have been frozen for years starting to rise to stop people unwittingly being drawn into paying IHT.”
Ms Dodd agreed that some bands should be increased to make the system fairer, bearing in mind that the policy is linked to care for the elderly.
She explained: “People see care costs as a higher tax on their assets, particularly at the lower end, so allowing them to keep more of their assets before paying for care and transforming inheritance tax into a tiered system would be much fairer.
“For example, the Government could consider having decent nil rate bands and separate tiers of inheritance tax rates for the next bands of wealth and start with a lower rate.
“The nil rate bands need to be adequately high in order to avoid catching the ‘middle’ and only target the truly wealthy.”
She also said ministers should ditch the tax relief for when a person makes a donation to charity, arguing this in fact means people leave less to good causes in their will.
If a person leaves 10 percent or more of their estate to one or more charities, the IHT rate for the rest of the estate – after the charitable gift has been deducted – is reduced from 40 percent to 36 percent.
Ms Dodd said: “This creates an artificial incentive to leave “only” 10 percent to charity and can result in reduced gifts to charities.
“The Government should also consider amending the lifetime giving rules to allow an increased annual allowance, which hasn’t risen from £3,000, for many years.
“Finally, stop thinking trusts are all about tax avoidance and have a proper reform of tax for gifting into trusts to make it the same as gifting to a person and reform the inheritance tax 10-yearly charge, which is expensive to calculate and brings in a minuscule amount of money.”
Elisabeth Squires, wills and probate solicitor at Britton & Time, said the IHT system could be made fairer by calculating the tax based on a person’s earnings when they die.
She said: “If someone who earned a lower annual salary was granted a lower inheritance tax bracket or rate compared to someone who earned a higher annual salary, this would likely disperse some of the tension between both the higher and lower classes and promote a more socially equal society.”
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