The housing market could take a hit if inheritance tax (IHT) is reformed the way the Labour party intends, according to experts.
Last month the Labour Party’s independent report on cutting inequalities in land ownership called for the abolition of IHT in a bid to stabilise house prices. Under the proposals, Labour would replace IHT with a lifetime allowance of £125,000 on the gifts each person could receive. Above this limit, recipients would be taxed at their income rate on an annual basis.
However, since then the Office of Tax Simplification’s (OTS) review of the IHT rules, which currently levies a 40 per cent charge on estates over £325,000, has been published, calling for a review of the seven year gifting rule. The review also proposed a new allowance and called for the abolition of the tapered rate of IHT.
Research published by Legal & General (L&G) revealed that parents and grandparents will help buyers acquire a total of nearly £70bn of property wealth this year. However, under Labour’s IHT plan, much of this amount would be taken away by the taxman. The ‘bank of mum and dad’ acted as the eleventh biggest UK lender in terms of purchasing property when L&G released its findings.
Hargreaves Lansdown personal finance analyst Sarah Coles highlighted that IHT is already Britain’s most hated tax, adding “the thought of these changes may fill parents with horror”, but noted that steps can be taken to “avoid it”.
“They can pass as much of their wealth to younger members of their family throughout their lifetime as they want; and as long as they live for seven years after making the gift, it’s not counted as part of their estate for inheritance tax purposes.
“The proposals would dramatically reduce the amount of money that people could give their family tax-efficiently – unless they have exceptionally large numbers of children,” Coles said.
The Labour report predicted that taxing gifts through the new system would raise £15bn in the 2020/21 tax year, which is more £9.2bnn more than under the current IHT system, and in a “more progressive way”.
The Hargreaves Lansdown personal finance analyst said: “The current rules on lifetime giving have also helped encourage people to share the wealth within their family before their death, and the earlier they make these gifts, the better from a tax perspective, because the more chance it has of being outside their estate when they die. It means younger people benefit from payments when they need them most. The new rules would remove this incentive.
“In fact, the rules may encourage people to spend as much of their money as possible during their lifetime, and leave their offspring to fend for themselves.”
In her closing comments, Coles urged those planning to “pass on as much” wealth as possible to their family to not put it off. “There’s no guarantee the Labour Party will adopt these proposals. However, it goes to show that tax policies can change,” she concluded.
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