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Labour plots scrapping and replacing inheritance tax

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Labour plots scrapping and replacing inheritance tax

Labour was accused of plotting a raid on the middle classes last night after John McDonnell signalled major reforms to inheritance tax.

The Shadow Chancellor said he was interested in replacing the current levy with a ‘lifetime gifts tax’ on cash or homes given to children.

He claimed the plan, which the Tories say would affect 10 million households, could ensure ‘wealth is more fairly distributed’. At present, the inheritance tax threshold is £475,000, or £950,000 for couples. Only 640,000 households end up paying the tax each year.

But a lifetime gifts tax (LGT) would see each child paying tax on everything their parents gave them – either during their lives or after their deaths – above £125,000. The two children in a typical family would, therefore, only be able to inherit an estate worth £250,000 tax-free.

Once an individual exceeds the threshold, any further gifts would be taxed annually at income tax rates.

Labour was accused of plotting a raid on the middle classes last night after John McDonnell signalled major reforms to inheritance tax 

Last night, the Tories warned Land Registry data showed as many as 10 million properties would potentially attract a tax bill if they were passed on. Mr McDonnell’s hints came on a weekend of turmoil for Labour as:

  • Union boss Len McCluskey launched a Trump-style attack on the Press for reporting claims Jeremy Corbyn was too frail to be prime minister;
  • Labour’s Brexit civil war deepened, with Mr McDonnell urging the party to back a second referendum;
  • Frontbencher Angela Rayner said she was ‘embarrassed’ over Labour’s failure to get to grips with anti-Semitism;
  • Chris Williamson, who said Labour had apologised too much over the issue, faced the threat of deselection from his Derby North seat.

The Mail revealed the inheritance tax plan last month after details were found in a report commissioned by Labour.

How does inheritance tax work and how does it compare to lifetime gifts tax? 

The current system allows parents to avoid inheritance tax if they have passed on gifts to their children more than seven years before their death.

When their parents die, children pay inheritance tax of 40 per cent above a threshold of £475,000. The threshold can be as much as £950,000 for married couples and civil partners. Next year the threshold rises to £1 million. 

The new levy would cover any cash and property above a ‘lifetime allowance’ of £125,000.

The allowance is per child, meaning a threshold of £250,000 for a typical two-child household. The tax would not be only paid after death but also annually through income tax on any gifts.

Once an individual exceeds the £125,000 threshold, any further gifts would be taxed at income tax rates.  

But yesterday was the first time a top Labour figure said they were actively considering it as a policy.

Asked about the LGT idea on Sky News, Mr McDonnell said: ‘We are looking at it and it might be one of those ideas, and we’re consulting on it at the moment.

‘I think it’s interesting. We need to have a fairer system of how we can ensure that wealth is more fairly distributed, that’s one idea and we are listening to a whole range of ideas.’

Tory Party chairman Brandon Lewis said: ‘This shows the true shocking extent of Corbyn’s tax raid on homes. Over 10 million would be caught by Labour’s new tax grab, hammering families across the country. Only the Conservatives believe in lowering taxes and helping people achieve homeownership.’

Labour insisted the proposal was not yet formal policy. It also said suggesting it would affect 10 million households was too high, because only 63 per cent of homes are owner-occupied. However, the Tories hit back, saying the owners of rented homes would still have to pay LGT.

The idea is contained in a report, Land for the Many, commissioned by Labour frontbencher Jon Trickett.

Mr McDonnell specifically ruled out another demand in the report – for capital gains tax to be charged on all house transactions.

He claimed the plan, which the Tories say would affect 10 million households, could ensure ‘wealth is more fairly distributed’. Pictured: Labour leader Jeremy Corbyn earlier today

The report, co-authored by environmentalist George Monbiot, said LGT would generate an extra £9 billion a year for the Treasury.

It prompted fears children will be taxed on financial help given to them by their parents during their lifetimes, including to buy a home.

As of March, the average UK house price was £226,798.

The report said: ‘The reforms to inheritance tax are designed to allow for the better sharing out of the unearned windfalls arising out of the boom.

‘In the long term, we recommend that inheritance tax should be abolished, and replaced with a lifetime gifts tax levied on the recipient.

‘Under this system, tax would be levied on the gifts received above a lifetime allowance of £125,000.

‘When this lifetime limit is reached, any income from gifts would be taxed annually at the same rate as income derived from labour under the income tax schedule.

‘The Resolution Foundation estimate taxing gifts through the income tax system would raise £15 billion in 2020/21, £9.2 billion more than the current inheritance tax system.’

The report went on: ‘Since implementing a lifetime gifts tax may take time, Labour’s plans to reverse the Conservative Government’s recent inheritance tax break for main residences is an important interim step.’

A Labour spokesman said last night: ‘We welcome this independent report by a group of experts and will consider the recommendations, which are not party policy.

‘As the report makes clear, Britain is a deeply unequal country and we need to start talking about that.’  

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