interactive investor comments on ‘The Inheritance Tax Puzzle’ report

Head of Pensions and Savings Alice Guy comments on the report from think tank Demos.

interactive investor comments on The Inheritance Tax Puzzle Report, by Demos. The report gives an interesting insight into how subjective and nuanced our views on wealth can be. 

Some answers within the survey were inherently contradictory and it is striking how many respondents find the inheritance tax rules complex with only capital gains tax scoring more highly for complexity.

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Alice Guy,Head of Pensions and Savings at interactive investor says: “Inheritance tax is a deeply emotive subject. The desire to pass on wealth to loved ones is strong and increases with age, and conversations around fairness are fraught with nuance. There’s nothing fair, for example, about young people being priced out of the property market or struggling to build long-term financial resilience due to housing costs. 

“One person’s idea of unfair can be another person’s rewriting of an intergenerational wrong. In our 2022 Great British Retirement Survey, when asked what the general public’s priorities were when planning their retirement finances, 15% said to leave a decent inheritance to their children, rising to 18% for people aged 66 and over.

“While the Demos research focuses on party political lines, inheritance tax by definition is usually paid by older people, so it’s the attitudes of this generation that are the most relevant. It’s this generation who will be the most affected by frozen inheritance tax thresholds at a time of high inflation.

“Older people are wealthier on average, having longer to build up wealth and are having to grapple with the reality of inheritance tax affecting their ability to pass on wealth (median wealth for 65–69-year-olds is £355,800 compared to £74,300 for aged 35- to 39-year-olds, Wealth and Assets Survey). In fact, those who expect to pass on between £200,000 to £500,000 think the IHT threshold should be raised to £500,000 (p54). Other data suggests that these wealthy respondents are mainly older, although the details are not revealed in the report.

“Q10 also reveals that older people are more positive about inheritance. 52% of respondents aged over 65 say that they are “completely fine” or “fairly fine” with some people inheriting more than others, compared with 42% of 45- to 54-year-olds and 37% of 25- to 34-year-olds.

“Although the average respondent thinks the inheritance tax threshold should be set at £300,000, policymakers should look carefully at the line of questioning in the survey, before drawing policy conclusions. For example, at first, 55% of respondents said that inheritances should be completely tax-free (Q5). But the next question asked how much they should be able to pass on tax-free, with a range of choices 12 of which were under the current nil rate band. When presented with a range of options and told to choose, not surprisingly most people plumped for a middle option.

“The great wealth transfer of the baby boomer generation is only just beginning and many of this generation and politicians will want to tread very careful before they stir the hornet’s nest as feelings run high on passing on wealth to your family. The UK population boom was between 1961-1972 – a group that started to retire in 2020. If they are relaxed about IHT now – they may not be in a few years’ time. Passing on wealth is a source of pride and often a final act of love to provide and help out younger generations.

“Our tax system is a careful balance between taxes on income and wealth. Swing too far in one direction and policymakers risk unfairly penalising those who have never felt wealthy and simply want to do the best for their family.”