To inherit or not to inherit - that is the question?

Wealth and taxes – an idea on inherited wealth

Context

The issue of wealth and whether it should be taxed and if so in what way is one which divides people. On one side there are those who consider any inherited wealth to be morally wrong and on the other those who think people should be able to pass on what they have earned to their children. 

 

To put it in context, there are significant disparities in wealth and such disparities have other impacts on the people involved. Generally those with more wealth have various advantages in life compared to those with less.  So should policy aim at reducing such disparities?

 

This short paper focuses on housing wealth – business and agricultural wealth is different to housing wealth.  Transferring such entities to another generation is generally beneficial in that a business can be transferred intact and viable.  

 

The current system operates on the basis that inheritance tax is paid on the estate of the person who has died. It takes no account of the amount of housing assets or earnings of the recipients of beneficiaries. 

 

An option?

One option could be to adopt a system where the beneficiary is liable for tax rather than the current system where the tax is paid on the estate of the deceased.  In the Republic of Ireland tax is paid by beneficiaries on assets over a certain level, currently the figure is €335,000 for children and grandchildren where their parents are deceased. Above the threshold the tax is levied at 33%.

 

It could be argued that this policy still favours the affluent. Therefore an alterative policy could be established which takes into account both the current housing assets and earnings of the beneficiary.  Let us say that the threshold above which tax is payable is set at £400,000.  The value of a dwelling owned by a beneficiary plus the value of the property they are due to inherit is calculated.  Anyone with few current assets would stand to gain more than someone with a substantial level of current assets. Any value above the threshold is treated for tax purposes as liable for income tax. It would be added to the beneficiary’s income and taxed accordingly.  Those with higher incomes would pay more than those on lower incomes.

 

For example if the beneficiary owned property worth £350,000 and was the beneficiary of property worth £350,00 the total would be £700,000.

 

£700,000 minus £400,000 equals £300,000 and this is the amount on which tax would be levied. 

 

If the beneficiary did not own any property or it was of limited value they would stand to gain more of the inherited property.

 

The end result would be to limit the accumulation of inherited housing assets by those already possessing substantial housing assets.  It would also aid in transferring second homes and holiday lets into the permanent residential sector.

 

Sources

For those wishing to explore the current system in Ireland see: https://www.raisin.ie/taxes/inheritance-tax/