The return of gift taxes

Tax policy, like fashion, moves in cycles. Back in the early 1970s all the men were wearing flares and sporting sideburns and the Labour Chancellor, Denis Healey, in his 1974 budget speech, declared that “nothing is more offensive” than people avoiding Estate Duty (ED) by way of lifetime gifts made more than 7 years before death. His solution was the introduction of Capital Transfer Tax (CTT), which imposed a tax on all lifetime gifts and on death. 

Flares have yet to see a renaissance but gift taxes are well and truly back on the agenda, with the release of a policy paper by the Labour Party called “Land for the Many”. Amongst many proposals designed to disrupt the private rental sector is a long complaint about capital inequality, the solution for which is apparently a return to 1970s style gift taxes.

A little bit of history

The first appearance of an inheritance tax was back in 1694 by way of the Stamps Act and took the form of a fixed duty on probates of 5 shillings. Then came Legacy Duty in 1780, followed by a hotchpotch of other duties and taxes until everything was rationalised into ED in 1894. Rather shockingly, the top rate of ED was 85% on estates exceeding £750,000, which makes today’s top rate of 40% look like a bargain! 

However, it was not until Labour’s introduction of CTT in 1975 that lifetime gifts were taxed. The tax quickly became despised by the middle classes and business owners alike as it applied to all gifts, even of business property. This had the effect of locking in wealth to the older generation and destroying family businesses on the death of the owners, as the business would have to be broken up to pay the duties.

The Conservative government in 1986 then abolished CTT and replaced it with the Inheritance Tax (IHT) we all know today. IHT essentially replicated the old ED, but with lower rates and generous exemptions for business property. Crucially, IHT does not impose a general tax on lifetime gifts made more than 7 years before death (except gifts into trusts).

What is labour proposing?

The Labour party thinks that the ability to make lifetime gifts promotes capital inequality, thereby preventing younger people from getting on the housing ladder. Their solution is for any gifts above a lifetime allowance of £125,000 to be taxed on the recipient at income tax rates. This means that the top rate of inheritance tax effectively increases to 50%, with a much reduced nil rate band (don't forget that Labour is also proposing to increase the top rate of income tax from the current 45% to 50%). 

Quite how taxing gifts from the older generation to the younger generation will free up capital for the latter is not adequately explained, as such a tax is likely to act as a disincentive to lifetime giving. The reality is that many young people only manage to buy a property with the aid of the ‘bank of mum and dad’ and since the average UK property price is £226,000 the proposed lifetime allowance looks inadequate. 

Furthermore, since it is likely that the wealth given away would have suffered income tax or CGT at source, this is an even more egregious example of double taxation. 

Labour’s policy paper is silent on business property relief, so we are not sure if business owners will see a return to the worst excesses of CTT. 

Do we need to worry?

In short, yes. The Labour party has put a lot and time and effort into this review and the resulting glossy policy paper, with a foreword by the environmentalist George Monbiot, is clearly designed to be the bedrock of any future Labour government’s tax policy.

As such, if you believe that a General Election is imminent and that Labour will win then you may wish to consider making any lifetime gifts, especially of business property, right now. Bear in mind that with the aid of business property relief you can still use a trust to receive the gift, with no upper value limit. Any other gifts into trust will be limited to the nil rate band of £325,000.  

Finally, call me a scaremonger if you like, but it occurs to me that if you are going to bring in a wealth tax then a natural companion to that would be a donations tax as the latter would be very effective  in  preventing taxpayers from fragmenting their wealth amongst family members to avoid the former. Indeed, a number of countries which have wealth taxes also have donations taxes. Labour's policy paper proposes the introduction of the 'progressive property tax', to replace the council tax. This will be an annual tax on land and property values and is a wealth tax in all but name. How soon before this annual tax on wealth is extended to other forms of property? 

Is there any good news?

Yes, there’s still no sign of the return of flared trousers.