New Calls to Reform Inheritance Tax

Critics of inheritance tax have called on the whole system to be ended amid evidence that David Cameron’s family had attempted to minimise such payments.

The Prime Minister took the unprecedented step of publishing details of his income and tax payments over the weekend in response to growing calls for greater personal transparency in the wake of the Mossack Fonseca leaks.

Prime minister’s receipt of gifts totalling £200,000

The prime minister could avoid up to £80,000 in inheritance tax after receiving a £200,000 gift from his mother.

The disclosure of Mr Cameron's tax payments show that he was given two £100,000 gifts in May and July 2011 by his mother Mary after the death of his father.

Downing Street has said the two payments of £100,000 were an attempt to balance the sums received by all the Cameron children, as Mr Cameron’s older brother had inherited the family home.

Inheritance tax is not paid on sums left to a surviving spouse, but is paid on an estate worth more than £325,000 before any sums are handed to family members. If Mary Cameron lives for seven years after the gift then no inheritance tax will be paid on the sum by her estate when she dies.

In general, making lifetime gifts, is exempt from inheritance tax so long as the donor lives for seven more years, is not viewed as avoidance. HM Revenue & Customs says avoidance “is bending the rules of the tax system to gain a tax advantage that parliament never intended”.

Current set-up is “grossly unfair” say some Tories

The revelations about the payments by Mr Cameron’s mother have triggered renewed calls from some Tory MPs for inheritance tax – popularly known as the “death tax” – to be scrapped.

Senior figures in the party have described the current set-up as “flawed” and “grossly unfair”, and critics have urged the government to consider a formal review.

One Tory MP said: “If we want people to save money to pass on to their families, why do we discourage them by taxing them again? It doesn’t raise a huge amount of money.”

Paul Johnson, director of the Institute for Fiscal Studies, said that the “incredibly unpopular” tax should be overhauled because it unfairly hits middle-earners: “One of the reasons it seems unfair is precisely because only the really pretty wealthy can pass on significant sums during life that don’t attract inheritance tax.”

Meanwhile, Labour leader Jeremy Corbyn also has suggested that there is a case for reviewing inheritance tax rules, and his deputy John McDonnell said that “nothing is off the agenda” in Labour review of tax policy, suggesting that the party could increase the inheritance tax burden.

Tax experts say prime minister’s gift was not a “dodge” but “sensible tax planning”

The £200,000 gift has been described as a “tax dodge” in some sections of the media – but tax experts have said there was nothing improper or exceptional concerning the revelations about the gift.

Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, claims that the prime minister’s family had in fact appeared to have paid more inheritance tax than necessary, and advised it would have been more tax-efficient to draw up a “deed of variation.”

Money Advice Service, a non-governmental organisation which advises consumers on financial matters, notes on its website: “If there will be inheritance tax to pay once you’re gone, then a good way to cut the taxman’s take is to make the most of gifts and transfers.” Making such a lifetime gift also has the advantage of benefiting the donor with immediate effect, the website notes.

IBB’s wills and trusts expert, Jacqueline Almond commented:

“Reporting on this has been rather sensationalist and the comments are reminiscent of the criticism aimed at Ed Miliband when he had benefited from a deed of variation. What David Cameron’s family did is exactly what we advise clients to do.

Making lifetime gifts and using available allowances such as the £3,000 annual allowance and gifts out of income is sensible tax planning. Inheritance tax has always been controversial but only around 5% of estates pay this tax each year. The introduction of the transferable allowance in 2007 has benefited many families, especially those who are often referred to as “middle-earners” and who in many cases, only have estates which pay inheritance tax because they own property and live in the South East. The introduction of the main residence nil rate band from 2017 will provide some relief for these individuals.”

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Contact IBB's experienced wills and trusts solicitors today to discuss your inheritance tax and estate planning issue. Call us today on 01494 790002 or email jacqueline.almond@ibblaw.co.uk. Alternatively please visit the wills, trusts and probate page for more information on how we can help you.