Lootman noted:
I don't know how capital transfer taxes worked back when they were a thing. But under current rules gifts do not have to be declared (except retrospectively if you die within 7 years) and so it would require a major change versus simply increasing existing taxes: Brand new taxes are a lot of work to implement and enforce. Ditto for a wealth tax of course.
The curiosity was IHT was grafted onto CTT (Capital Transfer Tax) in 1986 by FA1986 adding provisions to CTTA 1984 which, incidentally, explains why the CTT allowances - such as, e.g., the £250 for any gift, £3K annual and the £1K-£5K in consideration of marriage - have never been increased. These CTT allowances were intended to waste away under the IHTA regime that had no limit to gifts and assumed virtually all transfers were
potentially exempt. But that is also the weakness (for us, at least) of the IHTA regime - it is a simple matter (relatively in tax terms) to revert it back to CTT by abolishing the relevant provisions of FA 1986 and a few provisions inserted thereafter.
Under CTT there was a lifetime threshold that applied to the cumulative total of gifts made in a 7 year period. So all transfers of value were not potentially exempt, they were chargeable. Once you exceeded the threshold you paid the lifetime rate of tax and then, in addition paid the difference between the death and lifetime rate if you died within 7 years of the gift. This is best explained by a simple example.
Suppose the lifetime threshold is the same as the death rate nil-rate band (£325,000). You then make, on the 6th April, each tax year a gift of £100,000 to the same individual (or different individuals, it matters not). You start this gifting in 2020 and die on 5th April 2030. Ignoring the annual allowances for simplicity and the complications of 'grossing up' by assuming the transferee pays the tax, the position is as follows:
A. Under IHTA, each gift is potentially exempt and can be ignored until death. Then gifts made in the 7 years before death become taxable
seriatim. Thus gifts of £100K made 6th April 2023, 2024, 2025, 2026, 2027, 2028, 2029 all become taxable. The nil-rate band is applied to the three gifts 6th April 2023, 2024 and 2025 in full and the last £25K is applied to the gift made on 6th April 2026 leaving £75K of that gift taxable. Taxable in full are the gifts made 6 April 2027, 2028, 2029. The tax on the gift made 6th April 2026 is £24,000 (i.e., 32% as the gift is over 3 years but less than 4 years before death). Tax on each of the other taxable gifts (6th April 2027, 2028, 2029) is £40,000 each. Total tax is thus £144,000 payable on 31st October 2030.
B. Under CTT the first three gifts when cumulated fall below the lifetime threshold and are free of tax when made. The fourth gift made on 6th April 2023 becomes taxable to the extent the cumulation exceeds the lifetime threshold at the lifetime rate (20%) = £75K @ 20% = £15,000. Then each of the gifts made thereafter is taxable in full at the lifetime rate, so £20,000 tax on the gifts made 6th April 2024, 2025, 2026, 2027, 2028 and 2029. Lifetime tax total is thus [(6 x £20,000) + £15,000] = £135,000. On death additional tax become payable on gifts made with the last 7 years but only if the death rate exceeds the lifetime rate. This occurs in 2025 (24%) = £4,000 extra tax; 2026 (32%) = £12,000 extra tax; and each of the years 2027, 2028, 2029 have a 40% death rate so £20,000 extra tax each year. The total death tax is thus [(3 x £20,000) + £12,000 + £4,000] = £76,000. Total tax is thus £135,000 + £76,000 = £211,000 (i.e. about 46% more than under IHTA in this example). Note in addition £135,000 will have been payable
before death.
Eb.