Should we blow the bloody doors off inheritance tax?by
With both political parties taking excessive interest in inheritance tax, Philip Fisher wonders whether the politicians are taking things far enough.
While Jonathan Swift is best known for Gulliver’s Travels, he also wrote a witty satirical essay with the snappy title of A modest proposal for preventing the children of poor people from being a burthen to their parents or country, and for making them beneficial to the publick. If you don’t know it, seek out a copy.
No accountant could compete with such literary genius but, having taken an initial look at inheritance tax – this year’s hot tax or, at least, the country’s most hated – this article puts forward its own modest proposal that might just appeal to Rishi Sunak and Jeremy Hunt, as they attempt to reach the mythical land of sustained UK growth.
In response to the previous article, Mark Lee helpfully identified the source of the opinion that inheritance tax (IHT) is hated more than any other, pinning it down to Hargreaves Lansdown. Without wishing to denigrate that esteemed investment house, some might question whether their survey, which established that 24% of 2,000 respondents hated IHT more than any other tax, was based on sound statistical principles.
It may well be that 24% of Hargreaves Lansdown’s well-to-do clients have concerns about IHT, but they are hardly representative of the typical man or woman in the street. There is also a possibility that large elements of the media, not to mention many of the prime minister’s more strident backbenchers, might be going out on a limb to take potshots at a tax that only affects the affluent.
How else can you explain news stories suggesting that almost one-quarter of the country is against IHT when only 3.73% of estates are liable to it?
Some have suggested that the number of beneficiaries could be disproportionate but very few of those would even think about IHT, just being exceedingly grateful to have got an unexpected windfall from dear old Great Aunt Jemima, who they haven’t seen for a couple of decades.
We have now reached the point where the government of the day has jumped on the bandwagon and is leaking proposals either to reduce the rate of IHT from 40% to 36%, which will make no material difference to estates or the national debt, or abolish it completely.
On the other side of the House of Commons, the loyal opposition feels that an increase in rates should be under consideration.
Frankly, this is just political posturing from both parties. As others have pointed out, IHT currently makes a relatively small contribution to UK plc but it does have a rather more noticeable effect when one considers that now-outdated fad of levelling-up.
IHT is fairer and simpler to operate than a wealth tax and hits only those who can afford it, although one could argue that charging capital gains tax on all assets at death could be a reasonable and coherent alternative.
Fuss and nonsense
Looking at the government website, one discovers a set of really stunning statistics, based on the latest data available from 2020/21. That was the first year to be hit by the Covid pandemic but, even so, there were only 27,000 tax-paying IHT estates compared with 23,000 the previous year.
Given that the UK population is generally quoted at somewhere in the region of 67m people, this means that on average only one in 2,500 of the population was actually affected. Compare that with VAT, where one in one of the population is a victim and you realise how ridiculous all of the fuss and nonsense is.
The financial numbers are also telling. While the total tax take was £5.76bn, 81% of this came from the 4% of estates valued at more than £1m.
Taking this data into account, there could be a strong argument for raising the threshold considerably, thereby taking smaller estates out of charge but compensating for this by modestly increasing the rate of tax for estates in excess of (say) £1m. Closing many of the more popular loopholes would also bring in a pretty packet for the needy Exchequer.
The irony lies in the fact that while ministers and backbenchers constantly demand tax cuts, successive Chancellors have stealthily increased the tax burden on almost every taxpayer and, to add insult to injury, brought many more within the ambit of income tax by failing to raise the personal allowance in line with inflation.
Indeed, every current proposal seems to comprise tax cuts for the very rich to be paid for by the poor. This would be a good election strategy were it not for the fact that the poor outnumber the very rich by a factor of at least 20:1 and some might argue considerably more.
The modest proposal
Now for the modest proposal. Rishi Sunak and Jeremy Hunt are increasingly tending towards the tax strategies of their respective immediate predecessors, Liz Truss and Kwasi Kwarteng.
For those who have had the good fortune to forget about last year’s economic meltdown, this strategy worked on the counter-intuitive (all right – nonsensical) principle that, by reducing tax liabilities for the mega-rich, you would conjure up growth for the nation.
If Mr Sunak wants to take a bold step in this direction, then rather than abolishing IHT, which will only achieve modest growth, following the logic to a more extreme conclusion the obvious solution is to implement a negative inheritance tax awarding beneficiaries from all taxable estates with a 40% top up.
If the theory works, the supercharged double boost to the economy will be so great that Sunak and Co are bound to enjoy a landslide victory at the next general election. Then again…