Adam Smith Institute

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We should scrap inheritance tax

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What good is inheritance tax? Well, it's certainly very useful for a profligate government that has run out of money. As house and asset prices rise (thanks to all that money which the Bank of England has printed in its efforts to take the edge off the financial prices), more and more people are drawn into it. What used to be a tax on the rich is now a nice earner for the government, paid by the many. (Not by the rich, who can either leave the country or hire expensive accountants to get round it.)

One of the reasons why we are richer than our parents and grandparents is that we stand on their shoulders. They worked hard, and built up capital – roads, bridges, communications networks, machines, factories, sewers, enterprises and more – that we still benefit from today. That is what capitalism is all about: growing capital, which makes work more productive, life easier, and ourselves richer. And the desire to leave your children better off than you were when you were their age is one of the most natural of human instincts. And one of the most benevolent, and one of the most useful to human society. Trying to take that capital off people when they die is, equally, hugely destructive. So strong is this instinct that, even if we do have inheritance taxes, people find ways round them. If we know that the state will take 40% of our assets when we die, we find other ways of providing for our children. We give them money or build up funds for them during our lifetimes. We set them up in business. we buy homes for them, to spare them the huge mortgages we were burdened with. We hire tutors to make sure they pass their exams and go to university, so they can enjoy higher incomes throughout their lives. We ease them into our professional networks so they start life with friends and contacts who will help them.

The effect of an inheritance tax is simply to drive us out of the things that we know will be taxed when we die. That includes a lot of productive investments, that could be growing wealth for ourselves, our children and our fellow citizens. A report for the Adam Smith Institute some years ago found that, for as long as inheritance taxes – or death duties, or whatever they were called – existed, their yield to the nation as a whole had been negative, because they drive people into less productive ways of using their money, but leave them more to give their children. It's an unjust and counterproductive system. Inheritance tax should go.