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The great inheritance tax debate: for, against — and the facts

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Inheritance tax is controversial and has sparked debate for many years.

Some on the right want it abolished, while others on the left would like to see a 100% tax rate, abolishing inheritance itself.

The Labour party is exploring the tax, considering cutting the tax-free allowance. With an early election looming, they may well be in government soon and reforming the system.

Few estates actually pay the tax. HMRC figures show it was levied on 28,100 estates at death in the 2016/17 tax year, equating to just 4.6% of all deaths during that year.

But it does generate a decent chunk of tax revenue. Receipts in 2018/19 were £5.36bn.

That is small, relatively speaking, considering the total tax haul — but a few billion pounds is nothing to sniff at, especially during our austere times.

Inheritance tax is levied on the estate left behind by someone who has died, which includes any money, property and possessions they owned.

When the final value of an estate is calculated it is minus any debts left behind and funeral costs of the deceased individual.

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The standard rate of inheritance tax in the UK is 40%. But there is a £325,000 tax- free allowance before it kicks in.

So if an estate leaves behind £326,000, for example, only the £1,000 that falls above the allowance is subject to 40% tax.

However, if someone leaves all of their estate to their spouse, civil partner, a charity, or a community amateur sports club then it is typically tax free — even if the amount rises above the £325,000 allowance.

“If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £475,000,” the government states.

“If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die.

“This means their threshold can be as much as £950,000.

“The estate can pay inheritance tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will.”

There are also a number of reliefs and exemptions.

READ MORE: How to claim tax reliefs

For example, you can gift some of your estate away tax free while you’re still alive, which can help to avoid the 40% levy when you die depending on how soon before your death you gave parts of your estate away.

Moreover, there is a “business relief” which can reduce the value of a business or its assets when they are being passed on.

So what is the debate about? Here are some of the main arguments for and against inheritance tax, ones we’ll likely be hearing lots in the near future.

For

Inheritance tax only hits the wealthiest under the current system and relatively few people are affected. Those subject to it aren’t hard done by and they still inherit money.

It allows wealth to be redistributed from the top to the bottom through public services, welfare, or tax cuts for low earners, supporting those who really need the help.

The wealth that is taxed is unearned by its beneficiaries. It is better to tax unearned wealth than earned income so that effort and productivity is rewarded.

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The inheritance system cements inequality by allowing some people to inherit great wealth and do nothing while others work for their money. Inheritance tax addresses this unfairness.

A punitive inheritance tax encourages the wealthy to spend their money during their lifetimes, consumption that helps the economy.

Against

The wealth belongs to the person who accumulated it in their lifetime. The state has no right to swoop in and take it away just because they died, especially if they left a will instructing what should be done with it.

It is immoral to go against people’s wishes. If someone has accumulated wealth through their life, perhaps through hard work and savvy investment, then they should be allowed to leave the fruits of that to whomever they want, such as their children and grandchildren.

The wealth has already been taxed, perhaps multiple times, through income tax, capital gains tax, stamp duty, and so on. Taxing it again is the state acting like a vulture.

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The wealth is spread down to the beneficiaries, allowing more people to benefit from it and increasing their private wealth. They may then use it productively, such as to start a business, to make investments, or to spend it.

Not all beneficiaries will have done nothing to help generate the wealth they inherit. Some will have worked within a family business, for example, or contributed in other ways. They are entitled to their share.

The inheritance tax is broadly unpopular because it feels instinctively unfair to many people.

If it doesn’t have majority support it should not exist in a democracy.