Labour warned tightening inheritance tax would ‘stymie growth’
Plans to tighten inheritance tax rules on gifting and passing assets on to family members before death would damage UK growth and could lead to “regret” within the government, Labour has been warned.
Treasury officials are reportedly considering changing rules which allow Brits to pass on assets to younger family members over seven years before they die tax-free.
The “taper relief” tax rates on gifts made seven years before someone dies, which increase to 32 per cent if gifts are given three years before the day the person dies, could also be partly replaced with a lifetime cap on the amount of cash or assets individuals can donate, according to a source quoted by The Guardian.
But leading analysts at Hargreaves Lansdown, which is working with the Treasury on a drive to increase retail investment, have suggested that Labour may “come to regret” making complex changes to inheritance tax in the autumn as part of an effort to plug a £40bn fiscal hole in the public purse.
“From a Treasury perspective, [changes] would need to be balanced against the fact that, at the moment, these gifts allow for money to pass through the generations,” said Sarah Coles, head of personal finance at Hargreaves Lansdown.
“It means younger family members can put it to work for them, buying homes and spending.
“These things bring in taxes, from stamp duty to VAT. They also feed more money into the economy and boost economic activity.
“There is a risk that a change in the rules would stymie this flow of cash, which could have an impact on growth.”
Inheritance tax reliefs
Changing taper relief could also introduce a “cliff edge” system that means people who died one day short of seven years would be “hit with a huge tax bill”.
Coles warned the Treasury to look to previous consultations on increasing inheritance taxes, with a report by an All-Party Parliamentary Group on Inheritance and Intergenerational Fairness recommending a flat rate of tax on all lifetime gifts, receiving backlash from top investment managers.
Internal analysis from the Office for Tax Simplification, a defunct government body, said bureaucracy on inheritance tax and gifting rules has confused Brits. At the same time, an annual gift allowance could add complexity to the overall system due to handling of small payments.
The Hargreaves Lansdown analyst suggested Labour would be best placed not to make “knee-jerk decisions” they may have to row back on when further details and analysis of policies emerge.
Tax changes could empty Bank of Mum and Dad
James Ward, head of private client practice at the law firm Kingsley Napley, said one unintended consequence of taxing gifts could be younger generations receiving less cash from the Bank of Mum and Dad.
“If suddenly this gifting becomes taxable, then the money available to the next generation will decrease and this may have a negative impact on the property market and number of property transactions, which in turn will have an impact on other taxes,” Ward said.
“It will also be very difficult to police a cap concept and will create a challenge for HMRC and a substantial amount of extra paperwork.
“I can foresee that a number of people could find their way around this by gifting items or contributing to large expenditures and not reporting it.”
Mel Stride, the Conservative shadow chancellor, said: “Those who have worked hard, saved and want to pass something on to their loved ones shouldn’t be punished by yet more taxes from Labour.
“Tax rises are coming to paper over the cracks of the Chancellor’s economic mismanagement. Nothing is safe under Labour.”