That capital gains tax uplift at death
We do wonder what’s going through peoples’ minds when they say things like this:
Ms Haigh also advocated for families to pay a new CGT “death tax” on the estates of their loved ones. She said there were “questions of intergenerational fairness” under the current inheritance tax system.
“At a minimum, reforms should address specific loopholes, such as the capital gains tax uplift at death, which allows unrealised gains to escape taxation entirely,” she said.
Escape? Entirely? They’ve just been taxed at 40%.
Imagine, we treat an estate with all assets valued at purchase price. So, shares bought 50 years ago - or the personal holding of some entrepreneur in the business they’ve built - are valued at that purchase price. Say, to switch to over The Pond, Jeff Bezos’ holding in Amazon is at $5,000, what he paid for his shares. There would not be all that much inheritance tax payable in such a system. This makes politicians sad, for of course it does. So, at death, we “uplift” the asset valuation to that at time of death. Assuming no charitable donations and all that the IRS then gets a chunk of Bezos’ $200 billion, not $5,000. That’s what the uplift is - to value assets at current market prices in order to levy inheritance tax.
Having just paid 40% on such assets then yes, it seems fair enough that we start the valuation clock anew. We rated the assets at market price, took 40% and the inheritors only start paying tax on gains above that already taxed at 40% price.
The uplift itself is not the resetting of the purchase price to the inheritor. The uplift is the rating of the asset at current market prices for the purpose of inheritance tax.
Ms. Haigh, and others who propose a change, are actually saying that they want to have both inheritance tax and also capital gains tax off the same assets. Which, you know, seems more than a little greedy. And, with the other suggestion floating around that capital gains should be taxed at the same rate as income we would appear to get to a system trying to take 80 to 85% out of an inheritance. Which we would say is more than a little greedy.
Not only greedy but also distinctly non-optimal. One of the things about humans is that they do things for their children. The Reverend Darwin explained this at length and one of his apostles, Professor Haldane, pointed out that it really applies to grandchildren. Set up a system in which people cannot pass on to their grandchildren and they’ll do less to create what can be passed on. Yes, this has been tested, investment in, expansion of, family owned firms is sensitive to the inheritance tax rate. Humans do things for their children.
Of course, it is still possible to appeal to fairness here. Why would it be fair that some kiddies get money off gramps and some others don’t? Well, true, but then how many people think an 85% tax rate is fair?
Tim Worstall