No taxes are popular with those who pay them, but on August 2nd, 1894, one of the most unpopular taxes of all saw its debut when Inheritance Tax in its modern form was introduced. There had been predecessors, including the 1796 legacy tax introduced to fund the Napoleonic wars. By 1857 its scope was extended to estates of over £20 in theory, but was rarely levied in practice on those under £1500.
Its name has changed several times over the years - legacy duty, probate duty, estate duty, death duty, capital transfer tax, inheritance tax - but it became a tax on the value of land bequeathed, and has since morphed into a tax on the value of the assets that people bequeath to their heirs when they die. There are allowances and exemptions, including gifts made while still alive, provided the donor does not die until at least seven years later.
It makes a relatively small (as taxes go) contribution to Treasury funds. The £1bn it yielded in 1993 had risen to £4bn by 2008 as property prices climbed ever higher, but the Financial Crisis of 2008 cut it back to £2.4bn, but it’s been rising again. It is levied at 40% on estates above £325,000 (with some exemptions). For most people it represents a tax on the value of their home when they leave it to their children.
It is unpopular because it taxes again money that has already been taxed. Apart from wealth a person inherits, money they earn from salary and investments is money that have paid tax on as it was earned. Now when they die the taxman is going to grab a large slice. Parents want to give their children a good start, and want to pass on to them what they have made.
It is a destructive tax because it breaks up the capital pools that could otherwise fund start-ups. People tend to die when their children are in their 40s and 50s, just about the time when they might leave the comfort of a salaried job and venture into entrepreneurial activity. The monies left by their parents could help fund this, but the Treasury takes a big chunk of it and uses most of it for transfer payments.
It is destructive because it leads to misdirected efforts. People divert their assets into ways that avoid the death tax instead of into activities that might boost the economy. They put it off-shore, or into trusts, because they don’t regard it as a just or fair tax, and do whatever they can to avoid paying it.
It’s one merit is that it probably kicked out Gordon Brown. He was all set to hold an election to win popular backing for his premiership, but when George Osborne announced at a Tory conference his intent to raise the Inheritance Tax threshold to £1m, Brown panicked when he saw how popular it was, and backed off from an election he might have won.
There is, of course, debate about whether people should have an “unfair” advantage by being left money by rich parents. There is a similar “unfair” advantage by having educated, intelligent or caring parents, rather than spendthrift, abusive ones. It is human nature that people want to care for their children and do the best for them. People who might add more value to the economy and to people’s lives are deterred from doing so by the knowledge that much of their work would be for the Treasury rather than for their children.
It is a bad and counter-productive tax that almost certainly has a negative yield, given the economic disincentives it imposes. Several economists have estimated that it has lost money in each of the 125 years of its existence. It is time to ensure that the death tax itself is made dead and stays dead.