Press Story

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 per cent
gifts between £300,000 and £450,000 would be taxed at 30 percent
gifts over £450,000 would be taxed at 40 percent
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:

'Inheritance Tax has historically played an important progressive role in our tax system. But it now raises only £2.2 billion from a dwindling number of estates. It is also highly unpopular, despite best attempts to defend it. There is no political prospect of radically increasing its scope and revenue, so it is time to give up on it. It should be abolished and replaced with a Capital Receipts Tax on gifts.
'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.'

Notes to editors

Inheritance Tax is paid at a rate of 40 per cent 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 per cent. An estate of £1 million, for example, will pay £270,000, an effective tax rate of 27 per cent.

Inheritance Tax is paid on the estate of a person who has died and, far less often, on gifts and trusts made during the last seven years of that person's life. Inheritors are allowed to pay Inheritance Tax liabilities over a 10-year period, if the value of an estate is tied up in a house, or when the house is sold. Over 80 per cent of homes are less than the Inheritance Tax threshold.

Inheritance Tax is not paid on any assets left to a spouse or a registered civil partner. When the first spouse dies his or her unused Inheritance Tax nil rate band can be transferred to the second spouse. The threshold of married couples is, in effect, doubled. Latest figures show that 86 per cent of those who died aged 65 and over in the UK were either married or widowed.

Since the change to Inheritance Tax for married couples and civil partnerships in October 2007 the number of estates paying the tax has fallen from 34,000 estates in 2006-07 to 15,000 in 2009-10.

Revenues from Inheritance Tax peaked at just under £4 billion in 2007-08 and are expected to fall to £2.2 billion in 2010-11

If the government freezes Inheritance Tax thresholds at their current level for four years, as proposed in Alistair Darling's last budget, and wealth continues to increase at an average rate of 8 per cent a year over the next four years, less than 5 per cent of estates will be paying Inheritance Tax by 2014-15.

If the Conservative Party is able to implement its pledge to increase the threshold above which Inheritance Tax is paid to £1,000,000, less than 0.5 per cent of estates would pay the tax, and revenues would drop to less than £1 billion.

A Capital Receipts Tax on gifts above £150,000 would raise £1 billion more revenue than Inheritance Tax does now. Treasury figures released in the Spending Review show that extending free a free nursery place for 15 hours per week to disadvantaged 2 year olds (the poorest 20 per cent of families) would cost just £300 million per year. ippr calculations show that £1 billion could fund a free nursery place for the poorest two-thirds of families when their child reaches the age of two.

Contact

Tamsin Crimmens, Media Officer: 07800 742 262 / t.crimmens@ippr.org