02 October 2007

Death duties - another idea

The raising of the threshold for the payment of inheritance tax is very welcome but I would advocate a further reform which would make the system fairer and, in my view, cleverer.

At the moment, if a person's estate is above the inheritance tax threshold, gifts given during that person's lifetime can be counted as part of his estate and taxed accordingly if he dies within 7 years.

A 7 year window concentrates the mind - even a fit 70 year old can see the benefit of starting to plan to reduce inheritance tax. If this window was reduced to 5, 3 or even 1 year, there would be less of an incentive for people to plan to mitigate the inheritance tax payable by their estates. Furthermore, if the window were reduced to one year, this would be a financial bonus for many of those who have terminal illnesses - which often strike before old age, frequently at a time when a person's heirs are still financially dependant on that person - although admittedly the exemption for gifts to a spouse are consistent with this goal, not everyone has a spouse. In fact, I would extend the spousal exemption to children under 18.

However, by reducing the window in which gifts are at risk would be a popular and fair move and would allow money which is passed on to be spent rather than saved (to avoid the risk of a large tax bill) which is also positive for the economy.

It is time to get creative about tax, to make it simpler and fairer.

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