Rolled-up Trousers: Death and Taxes

If as Benjamin Franklin said, there are only two certainties in life - death and taxes - then Inheritance Tax manages to wrap both up into a neat package.

The Tories label it death tax, which some bristle at. I think it's accurate. It takes no account of who will be receiving the bequests. It is a tax on the deceased's estate (i.e. not the recipient) before distribution is made - therefore it is a tax on death. The name 'Inheritance Tax' is actually spin. Internationally it's known as the not quite as euphemistic Estate Tax, if it's not just honestly called Death Duties.

I'm not one of those who is in principle opposed to the idea of giving from a deceased's estate. I think it's very important that on our death we should be looking to make generous bequests to good causes. I'll leave it to others to decide whether the UK Treasury fits that description.

The major problem with IHT in recent years is that it was being levied on people that plainly could not afford it. Just their house would take them over the threshold. Often this would have been the family home for years, which ended up having to be sold in order to pay the tax.

Despite this, the government consistently refused to raise the threshold at which IHT was payable according to house prices - if this had been done in the last decade the nil rate band would be at £460,000 now rather than £300,000. The Treasury would say that the tax wasn't just about hitting property, but then would be very happy to reap the proceeds of those gains anyway.

This should have made the government more uncomfortable earlier, and it certainly shouldn't have taken George Osborne to do it for them. Taxes should be based on ability to pay. Families should not have to take out bridging loans at exorbitant rates, pay the tax, get access to their deceased parent's estate, and then sell off the family crockery to pay back the bank. The UK has one of the most punitive IHT regimes in the world. If we are going to tax people after death, then at least set it at a just level.

This is about more than the rate and threshold at which IHT is levied though. The government have to make a better case for the existence of this tax. Will Hutton wrote at the weekend that it’s about circulating wealth, rather than concentrating it. Does an individual appointing multiple beneficiaries not do this though? And since when did handing money over to the government become the best way of passing money around society?

Genuine philanthropic gestures would achieve this better. Currently, assets bequeathed to charities are exempt from IHT. This could go further by such donations being matched pound for pound by an actual reduction in IHT liability. So if someone were to pay £40,000 in tax by virtue of having a property of £400,000, if they gave away £40,000 to charity, there should be no tax to pay rather than facing a further tax bill of £24,000 as would currently be the case.

Then there is the issue of the fact that someone’s estate has already been taxed before they died. They paid tax on income and tax on capital gains, meaning after IHT has been levied, the same money ends up being taxed twice. If the individual was a 40% tax payer in life, and they paid 40% on the same money after they died, it means just about two-thirds of their earnings has gone to the state. At this point, the response comes in that there may be untaxed capital gains within that estate. This is actually an argument to tax someone on death as if that point was equivalent to a sale in assets, rather than as a punitive charge on their whole estate.

It would be arguably more just though that if you were taxing inheritance, to actually tax the inheritors. Those that receive the money should pay income and capital gains tax on the property they take on. There is still a case that needs to be made though about the ethics in doing this. In this country we do not tax transfers to a spouse. Why should we tax transfers to children?

To illustrate the practical issue with this, let us take the example of house prices that have spiralled in the last decade. The promoters of IHT say that a family home that has doubled in price is untaxed wealth, and when passed onto heirs, the state should rightfully take a good portion as an alternative to capital gains tax. The problem with this is that all homes have gone up in value. If this is a family home in which all reside, where are they to go? If the offspring have flown the nest, they may well be among the generation of twenty and thirty-somethings struggling to get onto the housing ladder due to the same problem of inflated house prices. Is it not right that they should benefit from their parents? More fundamentally, should parents not as natural instinct urges and give their kids a leg-up?

The benefit of the state intervening to take a sizeable slice makes no sense in these real life scenarios. The “hardworking family” has become a key phrase in politics, but this institution is royally undermined by IHT.

In short, I believe that as well as a debate on the level of IHT, there has to be a discussion on the very premise of it. Other countries around the world like Australia, New Zealand and Canada do not levy it. That’s not to say we can’t find our own way on this issue. Some thinking needs to be done in regards to the family home as I’ve stated above. The rest of an estate made up of other immovable property, cash deposits and investments could be taxed for capital gains or income on death, or the beneficiary could pay this according to their own rate. This would bring the tax back to what it should be – ability to pay.