Changes will make young heirs a little wealthier
The anomaly is that younger generations now find it harder to accumulate wealth of their own or find a foothold on the property market. For those lucky enough, there may be the prospect of an inheritance, but evidence suggests that already high income individuals are around twice as likely as low income individuals to inherit something.
Traditionally, inheritance tax has been thought of as a tool to help redistribute wealth and address inequalities. Modern inheritance tax in the UK dates back to 1894 when the Liberal government introduced an estate duty in its policy to try to pay off a £4 million deficit. Today’s deficit is, of course, more eye-watering and yet, in April, a new inheritance tax exemption kicks in, to increase from £100,000 to £175,000 per person by 2020-2021, effectively raising the total inheritance tax exemption to £500,000 per person. Where married couples jointly own a family home and want to leave this to their children, their exemption could be as much as £1m.
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Hide AdLast year, the Chancellor also abolished the 55 per cent charge on defined benefit pension funds on death. This is a significant new relief for anyone who has built up a significant pension pot, which can now be inherited, tax-free, by a family member on death, albeit with some planning.
Inheritance tax concessions for relatively wealthy individuals might seem ill-timed. However, in terms of UK tax revenue, inheritance tax counts for a relatively small proportion of overall tax takings. Generous inheritance tax exemptions are already available; in the UK, for example, where there is a family business or a farming operation, the assets are likely to enjoy relief from inheritance tax where, otherwise, the impact of a 40 per cent inheritance tax charge would threaten the survival of the operation.
Elsewhere in Europe, death duties are even more relaxed, compared to other forms of taxation. For example, in 2004 the Swedish Parliament voted unanimously to abolish inheritance tax. This was prompted, in particular, by the struggle which family businesses had in surviving from one generation to the next, as a result of the inheritance tax burden.
It is fair to say that for many of Scotland’s middle class, where the family home is the primary asset, the April 2017 inheritance tax changes will be a welcome relief, provided that the taxpayer has a suitable will in place to make sure they take full advantage of the relief. It may also help to swell the numbers of the younger generation who can afford to take their first step on the property ladder, following a greater family inheritance.
Hypothetically, if Scotland were to have the power to set its own agenda for inheritance tax and influence the distribution of wealth on death, would it follow in the steps of Sweden? Let us see how it deals with devolved income tax first.
Peter Shand is a Partner with Murray Beith Murray