Inheritance tax 'Burden' - fair or foul?

By Carol Barrie on Sep 11, 08 06:44 PM in Tax

The case of the Burden sisters has highlighted the problems currently being caused by the UK Inheritance Tax (IHT) regime, particularly given rising house prices, an exempt amount of only £312,000 for a single person and a tax rate following this of 40%!

No one can fail to feel sympathy for the octogenarian sisters facing the prospect of having to sell their long-time home in order to pay IHT when the first one of them dies. Bereavement is bad enough without having worry about the roof over your head.

The fact is, however, that their attempt to change the system and obtain the same IHT rights as married, gay and lesbian couples, was doomed to fail in the Courts. Furthermore, I see no prospect of HM Revenue and Customs (HMRC) willingly granting the same relief.

Why not, you may ask?

Gay and lesbian couples only get the same relief as married couples if they enter into a formal 'civil partnership'. If they granted relief to individuals in the Burden sisters situation how could they then refuse relief to long term co-habiting couples who choose not to get married, or friends who live together.

It is clearly right that there should be an exemption from IHT for any assets transferred on death to surviving spouses or to civil partners. It would be unconscionable for the financial security of the surviving spouse or civil partner to be jeopardised by having to pay IHT on monies which they have jointly built up.

Common law couples, who chose neither to get married, nor to enter into civil partnership, at least have a solution in their own hands. They can marry to benefit from the exemption. If they choose not to do so it is in the full knowledge of the impact this will have upon their finances.

The recent changes to make the IHT nil rate band of the first spouse or civil partner to die transferable to the survivor will ensure that in future all married couples/civil partners will ultimately be able to transfer twice the nil rate amount to their families or other beneficiaries on their death.

If anything, this further highlights the unfortunate position of the Burden sisters. What could HMRC do which would not "drive a coach and horses" through the rules, but would acknowledge the plight of people in their particular situation?

Subject to appropriate safeguards, why could HMRC not defer the IHT liability on the first death (secured by a formal charge on the property) and have the liability payable, with interest at an appropriate rate, when the second individual dies.

This means that HMRC will ultimately get their pound of flesh together with interest to recognise that they have had to wait for their money.

Of course the better solution would be to scrap IHT altogether. Is it any wonder that people object to a regime where they pay:

income tax on anything that they earn or receive by way of investment income
capital gains tax on any gains they make
VAT on most things they purchase
stamp duty land tax every time they move house
road fund licence on vehicles and petrol tax when they fill it up

and finally

40% of whatever is left (over and above the exempt amount) when they die!

Is it time for a fundamental re-think of this iniquitous tax? Unfortunately for the taxpaying public, dead people don't vote! But the Government would be well advised to remember that the survivors do.

If you think the current IHT system is unfair, please let me know and I will make sure that your views are passed back to the powers to be, in both the Government and the Opposition.