Inheritance Tax thoughts
I have spent a chunk of this morning discussing Inheritance Tax with a few people on Twitter. There is clearly a very strong feeling amongst certain people about this tax. Phrases like "Death Duties" and "Taxing the dead" were used at various points. There was also one person who had been forced to sell their home in order to pay IHT.
The view I have taken on IHT is that it is actually taxing the heirs rather than the dead. I have also perceived it as a means of increasing social mobility.
However I fully accept that there are problems with it. I don't think anyone should be forced to sell their home to pay it, that is just wrong. I also know that very rich people get around it in various ways. So I find myself in a position where I agree with the principle (although the exact threshold and percentage I am less definite about) but am concerned about how it works in practise.
from what I can tell, there seems to be a fairly clear position from both Tory grassroots (against in principle) and Labour grassroots (in favour in principle). I am curious to know what other people, especially Lib Dems think about this.
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It's ultimately a choice- personally I'd rather have higher taxes on inherited estates (and wealth more generally), and lower taxes on income.
But it reminds me of a line from The West Wing which is just as applicable here: "That's the problem with the American Dream, it makes everyone concerned for the day they're gonna be rich."
Someone having to sell their house to pay a tax, any tax is bad. When it follows the death of a parent or spouse it is doubly so.
However, any housing exemption would lead to further inflation of an already inflated the housing market.
It would artificially inflate housing as an "investment" when obviously the point of any exemption is to treat a house more like a home.
Its a nice thought to exempt the main house, but I think in practice the general negatives outweigh the particular positives.
It is better to tax inherited wealth more and tax earned income less.
Furthermore tens of millions of people would LOVE to have enough assets to have this problem.
If a couple own their house as joint tenants then on the death of the 1st spouse/civil partner the property passes to the other one with no liability to inheritance tax.
The inheritance tax rules have already been changed so that on the death of the 2nd spouse/civil partner any unused inheritance tax nil rate band from the first estate can be carried over to the 2nd one.
That means that at current rates, if the 1st partner to die left everything to the 2nd one, on the death of the 2nd one there is an inheritance tax-free allowance of £650,000. Seems quite generous to me.
The bleating about this has largely arisen because of house price inflation - but for that far fewer estates would be caught in the inheritance tax trap.
It would be better if the inheritance tax was applied to the recipient(s) to encourage the spreading of wealth.
The problem with taxing inheritance more and income less is that there wouldnt be enough inheritances to tax to offset a decent income tax cut. Tax take from IHT is circa £3-4Bn on the figures I can find from 2006/7 so probably less now due to house price falls and Stock market crashes. Income tax revenue is £155bn and NI £105Bn in 2008/9.
So you could confiscate ALL inheritances and get no where near the same money as from taxes on income. Most people have little or no savings when they die. Assuming you had some sort of nil rate band (perhaps the value of an average house, £150K?) and taxed the rest at 50% I doubt the revenue would be much increased from current levels. Possibly an extra £10bn. Which would equate to a couple of pence off income tax.
You have also got to decide if business assets would be exempt, as they are now. If not you would get more revenue, but because businesses would have to be sold on deaths, or borrow hugely to pay the tax, you would destroy much productive industry.
Equally would there be a 7 year rule as now, which means any gifts more than 7 years ago do not count for IHT? If not how far back are you prepared to go?
The more you tax inheritances the more wealthy people would leave the country. Why lose 50%+ of your life's work to the State (having already paid large amounts of income and capital taxes), when you could sell up and go somewhere else where the rules are more favourable? Unless you are going to force people to stay at gunpoint, or reintroduce exchange controls, you wouldn't get much more revenue anyway.
All these are practical reasons not to increase IHT. I personally think it should be scrapped entirely. It is immoral for the State to grab someones assets when they die. If personal property rights mean anything that includes the right to dispose of your assets as you see fit, including after your death. All taxes are legalised theft, and IHT is a particularly mean minded tax at that, inspired by nothing but jealousy.
There are difficulties with the tax in principle but for now (bankrupt government) it likely has to stay. What is so wrong with IHT is: -
1. It is a voluntary tax for the very wealthy. The richer one is, the more scope one has typically for making entirely proper arrangements to suffer little or no liability.
2. It is confiscatory for the middle classes whose scope for emulating the avoidance procedures of the very rich is usually severely restricted. Recall that per contrast to even 10 years ago, education often has to be paid for (certainly by the time of university level, often for quality reasons before then), sometimes health (where NHS provision is denied or unreasonably delayed), and meanwhile the few tax breaks that were available to ordinary people (like mortgage interest relief) have been withdrawn. After all that, to see accumulated wealth subject to yet further tax, keeping in view that in many cases a goodly proportion arises only from property price inflation, seems a bit much.
Keep in mind too in the context of the middle classes, their wealth is typically earned rather than inherited. Accordingly, their marginal income has been taxed at 40 per cent. income tax, now another 10 per cent. national insurance, and when they buy some good with the 50 pence that is left from the marginal £1, they (normally) suffer VAT at 17.5 per cent.. When the good forms part of their estate, it is then taxed at 40 per cent.. So, from £1 earned, the accumulated government take is more than 77 pence. The truly rich keep the £1 they inherit and do not suffer IHT on what they pass on. As New Labour would say, "It is the right thing to do".
3. It does not, as wicked Old Labour liked to claim, redistribute wealth - unless one allows in the definition a redistribution from the people to the state. (Assessing to tax recipients of a deceased's estate rather than the estate itself would be a sound means of encouraging redistribution but such change would be open to considerable abuse that would be hard to stop.)
4. It costs a great deal to collect and moreover it costs collectively the ordinary citizenry who might suffer some liability huge sums in lawyers fees and obliges them to jump through hoops making artificial arrangements that they would not otherwise make to protect their estates from the full extent of liability.
A saving grace is that on death there is no liability to capital gains tax (that tax that G. Brown has reduced so City (con) merchants pay less on their mega-buck payouts than their cleaners do on their normal minimum wage income).
G. Brown is fond of saying IHT affects only some small percentage of estates - this is misleading as most estates can plan to avoid the tax and I suspect many who are caught are the ignorant and/or lazy who have not done any tax planning or the not very wealthy who do not have the freedom to embrace the avoidance measures.
It's already been taxed once. How do you justify taxing it again?
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