RSA debate: Irish and UK inheritance tax regimes contrasted

John Cullinane, Tax Policy Director at CIOT, welcomed the panellists and the audience to the discussion before handing over to Paul Johnson, Director of the IFS, who chaired proceedings. Johnson conceded that there is a limit to how much economists can tell you on how to tax inheritance. The real issue to some comes down to ethical judgements and whether it is possible to make it work, he said. He contrasted Potentially Exempt Transfers (PETs) – gifts you give to other people during your lifetime - with the inability to pass on wealth from pensions and owner occupied homes tax-free. The IFS and CIOT were keen to get a speaker from Ireland because economists quite like that country’s lifetime receipts tax, he added.

Emma Chamberlain OBE, a barrister at Pump Court Tax Chambers, said inheritance tax (IHT) dates back to estate duty in 1894, then between one per cent and eight per cent, which was later extended to catch gifts given away seven years before death – but without a spouse exemption until 1972. It was voluntary in so far as, like today, you could give away the assets before death so there was no tax. Then the reservation of benefit (ROB) rules were introduced to stop people giving away assets and still benefiting from them. The tax became ‘compulsory’ in 1974 under Denis Healey’s capital transfer tax. Healey  thought it was always intended to be compulsory, which meant it was a cumulative tax on all transfers of wealth including lifetime gifts. There was no need for ROB provisions as all transfers were taxed anyway. Healey’s policy led to people delaying gifts because they figured his Labour government would fall – hence the need for political consensus, she said. After 1979 there was a steady erosion of inheritance tax under the Conservatives, such as bringing the rates down and increasing the nil rate band.  The Conservatives also introduced PETs.

“There has been remarkably little change to the taxation of business property and farmland taxation [in relation to IHT] in the UK since 1992”, she said; most other countries have a far less generous regime. Transferable nil rate bands were popular and led to a decrease in the yield of IHT. In 2012, the Conservatives reduced the IHT rate to 36 per cent, if ten per cent of the value of the estate went to charity, which has actually discouraged lifetime giving, she said. On the residential nil-rate band, she said the Government had to introduce downsizing rules which ‘even the Revenue said they did not understand’.

Chamberlain opined that it is odd that in the UK, people can keep foreign non-dom status for a long time and even after 15 tax years, it is easy for some to get around having to pay tax on a worldwide estate by using trusts, for example. “It is a voluntary tax for them”.  

She set out a number of ways that IHT might be reformed, covering both radical and more limited options. One radical alternative to IHT would be a comprehensive donee based tax, as in Ireland, so that the amount of tax paid is not governed by how much the donor has given away but by how much wealth the donee has inherited or been given during his lifetime from all sources. This should help wealth to be spread more widely in society, she said. But it does not bring much money to the Exchequer and has significant administrative costs. Another radical alternative to IHT would be to say that anyone who inherits wealth has to pay income tax on it.

Limited reforms to IHT, which may not bring much more money in, include setting different rates, a high nil-rate band, ‘longer run off’ on lifetime gifts or higher rates of tax on trusts, say 15 per cent every ten years.

On Business Property Relief and Agricultural Property Relief, Chamberlain said that there are powerful interest groups which may be against change, and that introducing a cap on the amount of relief that can be claimed would present an administrative challenge. One thing that could be done, is not have a capital gains tax uplift on death in relation to business and farmland to the extent it qualifies for IHT relief.

Toward the end of the speech, she talked of more radical options within IHT, which included moving back to a capital transfer tax and abolishing or limiting the spouse exemption. You could say there is no CGT rebasing on death, so you have some CGT to pay, she added,

“Should some assets such as real estate be taxed differently? I think there is an argument for this, possibly some assets that are very scarce, possibly could be taxed more harshly on death than other assets that can just be sold. That is another area that can explored.”

Chamberlain said she despaired that IHT will ever be reformed because of the vested interests involved. Any reform has a downside, so she doubts HMRC will be able to raise any more money from it. She said death could be treated as being an occasion of deemed sale that triggers CGT purposes bringing that tax into play. The UK has all the machinery and reliefs to collect that tax – but it is not a ‘panacea’.

She closed her speech by asking whether we can afford not to tax transfers of capital and wealth more efficiently.

Kieran Twomey, Council Member at the Irish Tax Institute, was intrigued by the interest in the UK in the Irish inheritance tax system. Its capital acquisitions tax (CAT) system was deliberately designed to be fairer than the old death duties. CAT is a tax on gifts and inheritances. People may receive gifts and inheritances up to a set value over their lifetime before having to pay CAT. Once due, it is charged at the current rate of 33 per cent (valid from 6 December 2012).

In 1999, Ireland moved to a system of tax residence. In Ireland, people get taxed when they take money from a discretionary trust, not when it comes in, and the country has a business property relief copied from UK but with a 90 per cent relief (with no monetary cap which is also the case in the UK). In 2008 to 2013, ‘dark years’ in Ireland when taxes kept going up every year, there was a 65 per cent increase in the gift and inheritance tax rate, Twomey said. Whenever CGT changes there always seems to be a  change in gift and inheritance tax, which he suspects is an unsaid policy in Ireland. Another difference  from the UK system is that the tax free amount per person is a lifetime limit for all gift tax – so no potentially exempt transfers – and therefore trusts offer little advantage. He made a general point that the yield from CAT in Ireland is less than one per cent of the country’s total tax yield.  In the UK, Capital Taxes, which includes IHT (£5 billion) among other taxes such as CGT and stamp duty, raised about five per cent of tax revenue in 2017/2018, according to IFS.

Irish government policy on inheritance is difficult to decipher, especially as the recent Budget did not mention the CAT, said Twomey. A report in 2009 said the CAT should stay but recommended that business and agriculture relief should go from 90 per cent to 75 per cent and that there should be a monetary cap of 3 million euros on the amount of relief that can be claimed; Twomey called the latter ‘daft’ and ‘counterproductive’ because tax should not be levied on an illiquid asset, which may lead people to be forced to sell a business. There is no outcry to abolish inheritance taxes in Ireland, with the focus of governments going towards reducing other taxes, such as income tax.

Responding, Paul Johnson was struck by the ‘incredible difference’ between how Ireland and the UK treat the taxation of inheritance even though they raise similar amounts, so perhaps we are stuck with  inheritance taxes raising only small amounts he suggested.

Questions from the audience began by speculating about the purpose of inheritance tax in the UK: is it ideological ‘soaking the rich’ or revenue raising? Chamberlain said there is a great deal of wealth globally that is not taxed. An attendee from the London School of Economics said that his studying of the USA had found that people do not move residency from state to state because of state taxes. Chamberlain said the experience of Canada and Australia contradicts this. Chamberlain said wealth taxes have ‘singularly failed in almost all countries’ where they have been tried, not least because they came across as ‘unfair’ in how they operate. More consensus is needed internationally to achieve wealth tax ‘nirvana’ she added. Twomey said a marked change in the past ten years in Ireland is the move to an attitude of acceptance of paying some form of tax. He reiterated his view that tax should follow the flow of money rather than illiquid assets. A chartered accountant asked why no one mentions setting the inheritance system according to recipients’ particular personal circumstances. Another speaker was concerned about intergenerational fairness. He asked whether the tolerance of our ‘highly flexible’ IHT system is ‘politically sustainable’ in the eyes of the younger generation given the prices they have had to pay in light of asset price increases, such as house prices.

Chamberlain replied that it is difficult to see a direct correlation and it is difficult to ascertain a consensus among younger people. Twomey said the younger generation have a higher tolerance of paying taxes than the older generation. A trainee accountant suggested a simpler tax system such as in Ireland would lead to less tax planning by British people. Chamberlain said Margaret Thatcher looked at something similar to Ireland but was warned that it may not bring in any extra revenue.

The event was held on 16 October 2017.

Audio recordings of the speeches below:
(You may need to turn your volume up because of background noise)

Introduction and Chamberlain - here

Twomey and Q&A session - here

Accompanying slide show - here

By Hamant Verma