The Left’s policy wonks have come up with another great wheeze to divide Britain’s hard-working classes from their cash. Namely Inheritance Tax (IHT) changes which will (says the spin) ‘cut tax in 87% of cases’ – but which aim to rake in another £147 million by raising the tax on the other 13%.
Britain levies IHT at an already punitive rate of 40% on all estates over £263,000. And giving away your assets to your kids before you die is no protection either. Unless you live for seven years, the Treasury still demands a slice.
But there is mounting outrage, because more and more families are being hit by this tax. HBOS, the big mortgage lender, says that 2.4 million UK homes are now valued above the £263,000 IHT threshold. That’s 2.4 million families potentially liable to death taxes – a million more than two years ago.
And you don’t have to be rich any more to get stung. In 86 towns in Britain, the average house price is now more than £263,000. That’s a lot of quite average people facing the glum prospect of tax inspectors pocketing 40% of the value of their furniture, their ornaments, their jewellery, their bank savings, their shares. It’s all a bit much, and it comes at the worst time for any family, a time of bereavement.
That doesn’t embarrass the policy wonks, of course, and it is not in the nature of Gordon Brown, the Chancellor, to weep as he squeezes the last drop of revenue from taxpayers. But with so many more families getting IHT bills – 32,000 this year, twice as many as when Labour came to office – things are starting to get politically uncomfortable.
Hence the plan for a ‘fairer’ system, with progressive bands – a new starting rate of 22% on estates of £263,000-£288,000; then 40% on £288,000-£763,000. Then a whopping 50% on estates over £763,000.
Yes, that leaves some people very, very slightly better off. But when the state grabs half of what someone has worked hard for, nurtured, and hoped to leave to their children, it can hardly be described as ‘fair’. Like four wolves and one sheep discussing what to have for lunch, it’s a straight expropriation of the few by the many.
IHT is an envy tax. The Left would endorse it, even if it didn’t bring in any money. Which it doesn’t. True, the Treasury will cream £2.6 billion of revenue from our legacies this year. But for the economy as a whole, death taxes have perverse effects which mean they have probably produced a negative yield in each of the 110 years since their introduction in 1894.
As the tax expert Dr Barry Bracewell-Milnes points out in his Adam Smith Institute report Free Wills, IHT makes people consume capital rather than build it up. Ever wondered why colour magazines are so full of ads for expensive cruises and guided tours to China, India, and Egypt? Is it because the retired couples they aim at have suddenly become rich or developed a fascination with archaeology?
No, the upmarket travel industry is booming because older people prefer to spend their money rather than see Gordon Brown get it. Why save up, why improve your home, why invest in UK businesses, when the taxman will take 40% of the value you create? You’re better to blow it on a trip to China. And that short-termism is bad news for UK plc. We need to be creating productive capital, not frittering it away. It makes us all poorer.
And it makes us shuffle our assets in absurd, convoluted, and unproductive ways. Seriously non-rich families now save money – sometimes a lot of money – by setting up IHT avoidance schemes. Solicitors do a roaring trade in writing them, and in devising new ones. Insurers market life policies designed to fall outside your estate. Tax havens welcome your business. It’s a flourishing market. But what a waste of human time and energy it all is.
As is all the paperwork that IHT requires. The Treasury says that the tax is cheap to collect, around 2.5% of yield. But, says Bracewell-Milnes, the compliance costs on family executors is nearly five times that. They face a snowstorm of probate forms, fee forms, schedules of land interest, securities, recent gifts made, and more. (And of course severe penalties are threatened should you make a mistake.) IHT is not a cheap tax at all.
Though IHT imposes such a big compliance burden and financial cost on families, particularly middle-income families, at thoroughly the worst time for them, its yield – £2.6 billion, compared to £1.6 billion in 1997 – is still a tiny fraction of the £500-plus billion that the Chancellor is pulling in overall. It seems hardly worth bothering, given the damage the tax does, its cost, complexity, and unfairness.
Indeed, the complexity of IHT compounds its unfairness. The rich understand the issues and have lawyers and accountants to protect them. But people of middling (or rising) wealth get caught up in the tax without realizing it. For most, their home is their only large asset. So we’re going to see more and more widows having to sell up and move somewhere smaller, just to pay the tax. That’s bad enough if you’re rich: but if you live in one of those 86 British towns and the home you must sell is no more than an average-value property, it’s pretty galling. And if the stress of it all shortens your life, your kids will be facing another IHT bill on whatever you have left.
In most other countries, you have to leave a much bigger estate to be hit with death taxes on the British scale. A German spouse would have to inherit E32 million before hitting the 30% tax rate. There are no death taxes at all in Italy, Australia, Canada and Argentina, not to mention populous countries such as China, India, Indonesia and Mexico.
Centuries ago, wealth stuck to rich families, largely thanks to the lucrative monopolies granted them by kings – Henry VIII giving monastery lands and rents to his supporters, or Charles I selling monopolies on bricks, soap, and salt. Today, wealth has to be earned. And competition is stronger, so that the wealth amassed by one generation can escape with frightening speed from the next. Death taxes are simply out of date – we no longer need them to prevent wealth sticking to privileged monopolists.
One of the strongest human instincts is to save and provide for our offspring. Not to keep them in luxury, but to give them a decent start in life. Inheritance tax is an inhumane tax in that it thwarts that basic, useful, and constructive instinct. And there are plenty of taxes on saving and giving already – capital gains tax, for example, (about 80,000 victims last year), and stamp duty on the value of our homes (stealthily raised by Gordon Brown a short time ago). So we really don’t need another tax on saving and giving, in the shape of IHT.
Inheritance tax is out of date. It is complex. It is costly. It is bureaucratic. It is burdensome. It is distressing. It is destructive. It is inhumane. It is unfair. It is unnecessary.
And it’s time to kill it off.
Dr Eamonn Butler is Director of the Adam Smith Institute.