Could Andy Burnham finally scrap inheritance tax? And what would replace it

Andy Burnham has recently been handed the keys to No 10 and some experts think he may have his sights set on a daring proposal – to abolish inheritance tax (IHT) and replace it with a levy to fund social care costs. The new Prime Minister has hinted over the years that if he bagged the top job he would scrap has been called a “tax on death” and replace it with a system that “taxed the wealthy properly”. He has previously championed for social care to be funded in a “different way” and on his first day in office said he wanted it to “operate on the NHS principle” – free at the point of use. Shorts While serving as health secretary from 2009 to 2010, he suggested a flat 10 per cent charge on all estates after death – and using the money to pay for free social care. Burnham recently said to reporters that people were paying for care in the “most unfair way possible” and said in May he has not abandoned his previous stance on IHT. How is social care funded now? Currently, adult social care funding in England is means-tested. Before a council contributes towards the cost of care, it carries out a care needs assessment to determine whether someone has eligible care needs and then carries out a financial assessment to determine how much, if anything, the person must contribute towards the cost of their care. The assessment will determine whether someone pays the full cost of the care themselves, shares the cost with the council or receive most or all eligible care funding from the council. If you have more than £23,250 in capital – such as savings and investments, and in some cases the value of your home – you are generally expected to pay the full cost of your care yourself. If you have assets below this threshold, you may be eligible for financial support. The average weekly cost of residential care if you are self-funder is £1,298 a week with a whole year costing £67,496 on average, according to home finder, carehome.co.uk. How would a new levy compare to IHT? Inheritance tax is currently charged at a rate of 40 per cent over a £325,000 threshold, though there are various other allowances that mean the real threshold for many families can be £1m, if married couples pool their allowances and pass on a property as part of their estate. Many people also use vehicles like trusts to cut their bills. The money raised by IHT isn’t currently spent on social care and goes to the exchequer for general expenditure. Given Burnham hasn’t actually announced any changes to this policy as Prime Minister, the details of how a new levy would work are unclear, but the suggestion from previous comments is that money raised would be used directly for social care costs. If charged at a 10 percent flat rate, assuming no other allowances, then passing on £1m would mean a family faced a £100,000 bill. What do experts think? Tom Archer, tax and financial planning expert at Quilter, said simply scrapping IHT and replacing it with a flat levy may seems straightforward, but the headline 10 per cent rate proposed by Burnham alone lacked some detail. “The key questions are where the threshold [above which it would charged] would be set, which assets would be captured, and whether existing exemptions and reliefs would survive. “While a 10 per cent levy appears much lower than inheritance tax’s 40 per cent rate, many estates already pay far less in practice due to allowances and reliefs. HMRC data shows the average effective inheritance tax rate is around 13 per cent,” Archer explained. Julian Jessop, an independent economist who works with the Institute of Economic Affairs think-tank, felt the idea was “poorly thought through”. He said a 10 per cent tax on all estates would probably raise no more the current system of IHT, which already brings in close to £10bn a year. Jessop added: “Applying a lower flat tax to all estates would mean that many more families are liable, while reducing the tax paid by the wealthier. This would not obviously be ‘fairer’, particularly if each person’s payment bears no relation to the amount of state-funded care that they actually receive.” Therefore, Jessop suggested the new levy would have to be on top of existing taxes paid on death. However, he argued this may disincentivise people to accumulate wealth to pass on to future generations. Jessop said: “The only remaining argument for a new ‘care levy’ is that the money could be ring-fenced specifically for the support of older people. But the Government can always allocate more money for any purpose without a specific tax to fund it. Linking spending to just one revenue stream rarely makes sense.” Who are the winners and losers Chris Etherington, tax partner at RSM UK, said if the change were to happen it would polarise opinions and there would be clear winners and losers. Anyone with very large estates, who might otherwise have faced a large IHT bill could benefit, while those with smaller estates may face a tax bill they otherwise would not have had. He added: “A lot of work would also need to be done in advance to avoid criticism of potential loopholes being exploited. The result may be that a care levy would need to apply to lifetime gifts as well, rather than just on assets held at death.” At the moment, gifts are IHT free as long as given seven years before death. Between seven and three years before death a sliding tax is charged, and less than three years before the full 40 per cent rate is levied. IHT is widely disliked by people – 54 per cent of people want to abolish it according to recent YouGov polling – so linking it to directly to social care could make it more politically acceptable, according to Archer. He said: “If taxpayers can see a clear connection between the money being raised and the funding of social care, some may view it as a fairer and more transparent system than the current approach.” But reforming social care is likely to be one of the biggest fiscal challenges facing any future government, so the biggest question for Burnham will be whether any replacement system could raise sufficient revenue to help meet growing health and social care costs. Archer said: “A 10 per cent levy may sound attractive, but without clarity on thresholds, exemptions and reliefs, it is difficult to know whether this represents a genuine tax cut or simply a different way of taxing wealth transfers.”