Chancellor urged to replace 'unfair' inheritance tax

The Labour affiliated Fabian Society today calls on the Chancellor, Gordon Brown, to use next Wednesday's Budget to replace Inheritance Tax with a Capital Receipts Tax to be paid by the estates of dead recipients of gifts rather than, as now, the estates of dead donors.

The report's authors , Ruth Patrick and Michael Jacobs, have taken as their model Ireland's Capital Acquisitions Tax. They propose two basic methods of administering the new tax. The first would have a tax-free threshold of a cumulative total of £80,000 of lifetime gifts. There would then be a tax of 20 per cent on the next £80,000 of gifts, 30 per cent on the £80,000 after that and 40 per cent on amounts over £240,000.

The alternative would start at £125,000 of lifetime gifts received, taking 40 per cent of anything over that. The present inheritance tax takes 40 per cent from the value of an estate after the first £250,000 before it is distributed. This is expected to rise to £255,000 in the Budget.

The report argues that £125,000 threshold would be the same as the current threshold of £250,000 if an estate were split between two recipients, more if the estate were left to one person, and less if it were left to three or more. The authors say: "By exempting gifts made more than seven years before death, and by providing reliefs on private businesses and agricultural land, inheritance tax has become extremely unfair. It is paid by the moderately affluent but not by the very wealthy, who can largely choose to avoid it. Those who receive windfalls through inheritance or gifts – particularly the very wealthy, who have the most ability to pay – should also be fairly taxed."

Mr Jacobs said: "Many people feel inheritance tax is a form of double taxation on earned income. A capital receipts tax would tax people when they receive unearned windfalls of wealth, in the same way that they would be taxed if the same money were earned. The tax rate would depend on how much the individual receives."