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Making inheritance tax 'fairer'
A work-related exemption from inheritance tax would send out a powerful signal to society that, if you work hard and pay your taxes as you go, you and your family will benefit as a result
Inheritance tax (IHT) is a subject which usually divides people into two camps. The first group takes the view that IHT is evil; people have already paid enough tax during their lifetimes, whatever they leave behind on their deaths has been taxed already, so paying any additional tax on death is just unfair.
In contrast, opponents of this view are often motivated by negative feelings towards the first group, or the wealth they have, and think that the government should take it off them and/or redistribute it to others who for whatever reason are less well off.
So it is difficult to get people to stand back from the issue and look in principle at what is going on with IHT.
The complication is that while we are alive, tax is in general charged on income or profits, yet once we shuffle off this mortal coil, IHT is charged on capital, being what our after-tax income and gains becomes.
There is more sympathy for the first view expressed above on a general level when it comes to the ordinary working man made good, particularly on the right of the political spectrum. But this argument against IHT disappears (in the eyes of those on the left) when someone dies who has simply inherited great wealth without ever having to work for it.
If the purpose of IHT is to tax capital, the state already recognises that there must be a limit to it by the existence of the personal allowance, currently £325,000 per person.
Nevertheless it feels able to take 40 percent of the excess above this amount (although this can usually be deferred until the assets pass down to the next generation), and feels more justified in doing so the richer the individual or family concerned. Why, the argument runs, should a (multi)millionaire be able to keep everything, when there is such inequality in society?
So is there a middle way which could carry an overall stamp of “fairness”, and satisfy critics on both ends of the spectrum? I think there is. If we think work should be rewarded, especially where in his or her lifetime an individual has paid every tax going, then we should give a work-related exemption where IHT is concerned.
As an example, we could provide that for every year that someone has been in employment, their IHT bill will be reduced by 1/40. So for someone who works continuously from 20 to 60, he or she would pay no IHT, as he or she would have paid 40 years’ worth of income tax.
Alternatively, you could receive a total credit against IHT for all the income tax you have ever paid on employment income. There would therefore be a clear incentive to work; the Treasury would benefit through income tax receipts; and the culture of work is promoted by our tax policy.
Unless redistribution is all, why would anyone object to this? The individual with his or her trust fund, who has never had to work and whose wealth has come solely from inherited wealth and the income it generates, would not benefit from the proposed IHT exemption, whereas an ordinary person who works hard and does well would.
I don’t say that there aren’t problems with this approach or that it takes account of every conceivable set of circumstances that might arise, but revising IHT in this way would at least send out a powerful signal to society that, if you work hard and pay your taxes as you go, you and your family will benefit as a result.
Terry Cooper is a solicitor who specialises in tax and estate planning. He writes here in a personal capacity
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@Julian - Should we assume that it's OK for the government to need £x in tax? I'm sure those with big estates would rather neither of the options (tax now, or later). I'm sure they'd argue that the government should keep its nose out. And good on them.
Interesting.
I met a top US economist once (on the edge of the Nobel Prize league) who was no redistributionist liberal but who surprised me by coming down hard against large inherited wealth. He argued that it was not good that anyone should receive huge amounts of accumulated family money without having earned it.
However, he did not want the US Government to have any large capital inflow from someone's death - rather those with large wealth should be offered options of passing the whole lot to charitable foundations tax-free. That also would help boost the weight of the non-state sector in doing Good Works.
We in the UK esteem steady familial capital accumulation down the generations, so we tend to be opposed to over-heavy IT levels. The ideas spelled out above make sense by giving new work and savings incentives, although it too does not really answer the charge that the idle progeny of the very rich should not get an undeserved massive boost in life...
This article completely misses the point. The reason why IHT is the fairest of taxes has nothing to do with whether the deceased has worked or not for this wealth. It is because those who stand to inherit from them clearly haven't.
If you have to tax people to support government spending (and you do) why not take it from those who have done nothing to earn it? After all, even after IHT, they will still get an unearned capital sum beyond the dreams of most working taxpayers.
@Harry Goldstein - have you not rather missed the point, too? If tax is so necessary to support government spending (to which one may beg the question, is government spending necessary? But anyway...) and the rich are the source of this 'free' money, would it not be better to create policies which encourage the rich to stay put? Or is it sensible to hound them for their hard earned cash until they up-sticks and say "f*** it, I'm off abroad"?
Totally disagree. We need to be thinking how to starve the beast (ie the state) not continually feed it. We are already taxed to the hilt, see our elderly people dying of cold each winter yet can find billions to hand over to the EU, to Africa and to various other unworthy causes, not to mention military adventures here there and everywhere. The state is NOT your friend - and a man has a right to do whatever he likes with his own property, even pass it on to his children.
A more sensible approach would simply to treat the income from an inheritance like any other income - up to the personal allowance it is tax free after that you pay tax on it.
Ie the legacy itself is not taxed but the people who receive it are.
This would tend to favour the spreading of the largesse amongst as many people as possible, and seems to me to be truly fair.
I find death duties despicable - at the moment of maximum stress in a family, the taxman shoulders in and starts ordering people to sell their houses etc. Quite disgusting.
I'm afraid both Libertad and Tarka have missed the point. The article wasn't about what the level of government spending should be, but what is the fairest form of tax. After all, even if you believe in a minimal state which does nothing but maintain an army, police force and legal system (and I'm assuming neither of you would abolish those things) then they would still need to be supported by some form of taxation, and the question would still arise as to which is the fairest form. Personally I'd cut almost any other form of taxation (income tax, VAT, fuel duty) rather than IHT.
No Harry, I haven't missed the point. I don't want to pay for the EU, aid to African dictators, inner city outreach workers, diversity co-ordinators, translation services for ethnic minorities who don't speak English and show no intention of doing so, to mention but a few. So, you think inheritance tax, imposed after a lifetime of being fleeced in every which way but loose by a rapacious state is the best form of taxation? No, it is not. It is theft.
There is another argument for inheritance tax that has nothing to do with redistribution. If the government needs £x in tax (ignore what you think x should be), is it better to get it from income tax and VAT payable out of people's spending money, or from people's estates on death? Would you rather pay more tax now, or have it taken from your estate when you die?