Jason Holden is proving to be a regular, and welcome reader of this blog. But I want to pick up on something he said in a comment yesterday (and I stress, I paraphrase for emphasis):
The Aussies ... can’t understand that once you have acquired assets over your lifetime out of already taxed income that your family get hit with another tax once you die.
Well, I've got news for the Aussies who think that this is what we do in the UK (encouraged by a British media who have fueled this issue wholly inappropriately).
The tax we're talking about is UK Inheritance Tax. It's charged on estates on death worth over £285,000 but the following don't count as being in the estate:
- all gifts to your spouse
- all gifts made more than seven years before death (if they're genuine)
- almost all business and agricultural assets
- all gifts to charities
- all gifts to political parties.
So let's be clear, that means most things aren't covered by it.
In fact just 36,000 estates pay Inheritance Tax a year in the UK. In total they pay £3.6 billion. That's £100,000 each, which at the tax rate of 40% (in most cases) means the average estate that pays is worth around £535,000.
Let's look at two further statistics. 512,000 people died in the UK in 2005. So, one in 14 paid Inheritance Tax (7%). That's not a lot.
Using data from Inequality and the State by John Hills, which admittedly is only current for 2001 but is good enough for the current purpose, the top 5% of the UK population owned 43% of all assets in the UK, and the top 10% own 56%. That sounds pretty much like 7% own about 50% to me (the concentration is rising by the way, so I might understate this).
Now, how much is the UK worth? Well, according to National Statistics it's £6 trillion, almost exactly. Of this privately owned housing represented more than half, at £3.35 trillion. A trillion has 12 noughts after it, by the way.
But the average house price is £185,000 . So that means there are 18.1 million of them, which given that there are 59.8 million of us sounds about right. But that means the average householder has a long way to go to pay inheritance tax. And the vast majority of houseowners (maybe 90+ % of them, given that those dying are more likely to have a house than most people, since until the age of 30 most people don't in the UK now) don't pay Inheritance Tax despite that fact.
There's a way to estimate this. First of all, if we assume that of the non housing assets (that's £2.65 trillion) at least 50% is owned by those who pay inheritance tax, based on the logic above) that means these 7% of people (4.2 million people based on there being 60 million of us) own an average of £15,000 of assets each. So, assuming that they each have their own house when they die (which is probably true for estates chargeable to inheritance tax since almost all houses pass to spouses tax free on the first death) that means the average estate of these top 7% when they pay inheritance tax is made up of financial and other assets worth £315,000 and a house worth £220,000, again based on the logic noted above. All of which seems reasonable.
So, let's look at why this should be taxed. First of all, let's dismiss 93% of the population. The Aussie fear is wrong for them. They don't pay Inheritance Tax. . Nothing is taxed twice in this case. And these are, after all, the normal working people.
So what about the rest? First of all, let's deal with those very expensive houses. The Nationwide Building Society publishes some lovely data on average house prices in the UK since 1952. Now, men are dying at around 76 now and women at 81 (give or take) so let's work on the fact that given that most would have bought their most valuable house (the 'family home') sometime around the age of 40, given the average age of families when they were raising children, meaning they have owned it for 35 years. Or, they acquired it in 1970. When the average house price was £4,500. So, that's an inflation gain of £180,000. They never paid for that. They paid £4,500 out of their wages. The rest has been untaxed.
If those paying Inheritance Tax now have house prices that are 19% above average maybe they also had the same ratio in 1970. So they paid £5,300 then. Which makes their inflation gain near enough £215,000. Which means that the vast majority of what is taxed is, in fact, this inflation gain since the average value taxed is about £250,000. This can be taxed fairly for two reasons:
- it has not been taxed before;
- the person no longer needs to retain the value to buy another property, they're dead.
But that still leaves another part of the estate which will be taxed. That is the financial assets. So why is it fair to tax them? For a good and simple reason, which is that capital gains tax is not paid on death. Inheritance tax acts as a substitute subject to a massive exemption in most cases. If capital gains were charged instead it may be fair to cancel Inheritance Tax, but you really can't have it both ways. There is no God given right to pass on an estate tax free.
Which, if I'm candid suggests that almost everything written in then popular and accounting press on Inheritance Tax is nonsense, both as to fact and economic logic. I'm all for it. Not least because it fits in very well with my logic that it's not fair to tax something it's equally inappropriate to provide a means to not tax something at all which is then open to abuse. Inheritance Tax rarely charges something twice (and if it does, it will only be on the very rich who, almost certainly avoided more of their fair share in life since their overall tax rate is always lower than the 70% of the population immediately below them) but it does stop things being taxed not at all. And that's good.
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Richard, I am glad I am fueling your blog ….
Tax planning aside (sorry, my sister is a CTA and will be horrified to hear me say tax planning aside) also ignoring those parts of an estate that drop out of the IHT regime, and although the average house price is currently (national average) £185,000 this means there are areas where house prices are nowhere near that price like in other parts for the country you can’t buy a garage for that, this means I would think, and this is only a personal view, previously estates coming under the IHT regime have been from people my grandparents age, who have not amassed as much wealth as say parents of my generation of 30 something’s, and dare I say it ourselves, therefore would it not stand to reason that although those becoming liable to IHT previously have been small if we look forward say 10 years it will be a very different story?
At which time the concern about the relevance of IHT becomes an issue?
PS This is assuming we don’t all go and live in Spain next door the Dennis and spend all our money first!
Jason
I accept some need for changes in bands will be needed over time. But so long as most wealth has not been taxed previosuly (and it has not) my logic remains sound. Remember, business assets are already free, as is agricultural property. And if, that apart, the concentration of wealth goes up, so spreading the range of wealth disparity in society (which is always harmful to well being) isn’t it wise that Inheritance Tax does remain, precisely to limit the harmful growth in that ratio?
Richard Murphy
http://www.taxresearch.org.uk/blog/.
Way too many assumptions and generalisations Richard though I understand the context.
I am under the clear impression HM Treasury anticipates increasing its IHT yield, precisely because of house price inflation and in particular the situation in the south east.
Given that in Spain alone, its government expect the number of ex-pats living there to triple over the next 10 years – and by the way – the coastal regions are creeping steadily towards SE England property prices – there must be a heck of a lot of people out there thinking they’re going to get hammered at some point. And that’s before one considers the second home issue.
I can think of several people Richard would class in the 93% group who are in their mid-forties and thinking about IHT planning. There must be a reason for that.
My view is, property has in the last 5-10 years gone up far faster than the IHT band has increased, it is said that over the next 5 years it will increase by 50% again, and I guess this will continue as we have limited housing stock (being an island and all that).
Therefore IHT being paid by the average home owner is going to become more of a reality, as for concentration fo wealth, that is a bit political for me, but, I like my friends downunder, have never liked the fact you achieve wealth (in this case your home is all I am looking at) out of taxed income, then how is it moral that you are taxed again on death?
We have had to do IHT work for 90% of our client base already, surely I am not the only one who has clients who fall into IHT due to their home, and we are not talking about the super rich, just ordinary people who own family sized houses!
Dennis
Tax works on the basis of assumptions and generalisations. They’re a ‘one size has to fit all’ case of management. So the logic is right.
Going to Spain doesn’t help by the way – not unless you prove being non-domiciled. And second homes are not subject to CGT on death so my IHT logic at that time is right, if the gain is inflationary, why not tax it?
In other words – what’s wrong with the logic – and let’s ignore the micor case studies. That’s for the Daily Mail who have a quite different agenda in all this.
Richard Murphy
http://www.taxresearch.org.uk/blog/.
Re Jason’s comment (number 4):
I would agree if your house had been paid for out of taxed income. But, as I show, that’s just not true in the UK at present. So, what’s the problem? There is no double taxation if the house got its value from inflation.
Richard Murphy
I understand your argurment that you are being taxed on the inflationary increases and not the actual monetary values paid.
I just don’t like it, sorry, but it’s a personal view, anyway I need to finish off my application for residency in Australia (only joking mum!)
Spanish CGT kicks in on death, subject to some complex and ugly rules over succession. Registering on the Padron puts Hacienda first in line for tax dibs under Spanish residency rules.
How do you come to the conclusion that purchasing a house doesn’t come out of taxed income? You say so: “They paid £4,500 out of their wages.” Net – last time I say a P60.
The logic only stands up if a person accepts your underpinning argument that ‘tax works on the basis of assumptions and generalisations.’ Even then I’d argue the logic remains flawed because you’re extending it into areas that cannot be proven – merely assumed but without providing any proofs. That’s a weak argument IMO because as you know, you can’t prove or disprove a false positive.
The more fundamental flaw here is to assume that IHT is in effect CGT on death. There is no way you can equate the two when you compare them side by side. And indeed, the difference in treatment around PPR would prove that logic flawed anyway. If on the other hand you were to argue that the system of taxing the accumulation of wealth is unfair and provide reasons for that argument then your general argument around fairness would make more logical sense. The very fact there is a disconnect between the two seems a good starting point.
However, you still have the very practical problem of overcoming the notion that the accumulation of wealth – whether by luck, judgement, good fortune or inflation – is something that can or should be fairly taxed. The fact you may think it ‘fair’ doesn’t necessarily sell the idea to those who end up paying. And as we both know, taxes that are perceived as unfair are the ones most likely to be avoided or evaded.
In essence I am saying that to aggregate CGT/IHT is the wrong argument in the pursuance of fair taxation because it does nothing to challenge the status quo – except on the basis of rates and exemptions. That a very hard sell to the man in the street who may (unfairly) end up selling his home to pay for nursing care. I know the two arguments are not connected but they are in the minds of those who pay for all sorts of perfectly valid historical reasons.
Here, I think the French and Spanish operate an eminently sensible (thought practically flawed) solution. An annual wealth tax based on total assets and moderated by family circumstances.
They have access to UK equivalent of Land Registry, where individually owned property valuations are recorded based on notarised contractual records. They have access to bank accounts. They have access to certain (but not all) foreign bank account information. They exchange information with other EU taxing authorities. They’re able to make reasonable estimates about other assets and investments. They provide a series of exemptions on a sliding scale. It is a system that broadly works for tax (but not social security) purposes.
It’s a system that isn’t resented in the same way IHT is taking on prominence but it is embedded into the lifetime tax system.
Over to you Richard but remember these are opinions – they don’t have to be right or wrong!
[…] Stephen Byers wrote an article attacking inheritance tax for the Sunday Telegraph this week. Byrers, you might recall is one of Tony Blairs’ Cabinet failures, but is still close to No. 10. He brought out all the usual wrong arguments on Inheritance Tax that the right love, such as it being double taxation. I won’t repeat why he’s wrong here – I’ve already done so. […]
Inheritance tax is in my opinion an unfair tax as it is levied on the estate of someone who has died.
There is no measure of the wealth of the person receiving the inheritance. A pension living on the poverty line who received 10% of an estate valued at £100,000 would receive exactly the same amount of money as a millionaire who received the same 10% from the estate, surely this cannot be fair?
I run a will writing company and as such see many people who are trying to reduce the burden of inheritance tax. All they want to do is pass on to their families the money they have spent a lifetime building up, surely this can not be wrong?
It is possible to do mitigate the effects of inheritance tax, with the use of an inheritance tax will. Using other means like additional life insurance the whole value of an estate can be protected but many people do not realise this and instead see 40% of the value of their estate going straight to the Inland Revenue.
In my view IHT should be scrapped and some form of means tested taxed introduced so that the recipient of the bequest pays a proportion of tax depending on their income.
Until such time as the law is change companies like mine will do all we can to help people mitigate their final tax bill.
http://WWW.boon-solutions.com
Adrian’s comment is interesting, but I hope he’ll forgive me for saying so, not completely logical.
The same argument that it’s not fair that a person cannot enjoy 100% of the value of something because of tax can also be applied to pre-tax income, post tax income and so on, and if accepted would mean no tax would be charged.
But the point about a cumulative receipts tax for the charging of gifts is a valid one. The questions is, at what rate, and how are they declared? And how do you overcome all the issues we have now such as gifts to spouses, life long partners and so on?
Thank you for the feedback on my previous post, perhaps I did not make my point clear. My suggestion was that the recipient of a bequest should pay any relevant tax at the same rate as they pay income tax. This to me would be a much fairer method than the donor’s estate being charged 40%, for anything above the nil rate band.
http://www.boon-solutions.com
.
I must admit this all IHT debate puzzles me. Surely, what is important is the redistribution of wealth and the reduction of inequalities in society, hence some kind of IHT regime. I could not agree more with Richard when he says that IHT is not double taxation and the main problem with the UK has to be the ridiculous amount of money invested in real estate.
I do not know if I saw the figures on this blog or somewhere else, but if half the UK wealth is made up of real estate, and no further value is created appart from inflationary and speculatory, then the only way to insure that some redistribution of wealth is effected is to have some kind of IHT.
Also, I would like to bring two further points to the debate:
1. Non-domiciled non-residents purchasing properties through structures (avoiding all taxes) is a major factor of inflationary prices in the SE. Surely, your typical Russian client purchasing a property in Knightsbridge through a Panama company at a ridiculously high price, knowing that the sale will be CGT exempted and the death of the beneficial owner will trigger no IHT has an important impact of property prices in London and surroundings. Is it not time this loophole is closed?
2. Well-off parents helping their children to purchase a property by giving them 30, 40 or 50% of the deposit also has a pervert effect on inflationary prices of properties. Not only does that kick out of the market less well off people (hence the importance of redistrbution of wealth) but also the IHT 7-year rule applies.
The prices of properties do not reflect economic reality and scrapping IHT on properties would have a devestating effect for this country. Inequalities would grow (and Labour has not done a good job in reducing these in the last 10 years) and the North/South divide would increase.
I believe that either a French approach to IHT with bands starting a 5% and increasing to 40% should be taken depending on the blood links, or that, indeed, some kind of CGT should be put in place.
Let’s not forget that politicians want to be elected and that IHT is there for an eonomic and welfare reason. Instead of listening to Daily Mail readers, maybe some time should be spent on educating them to understand the rationale of IHT and taxes more generally.
When owners of ordinary homes and investments – clobbered as they or their estates are by the 40% ‘Inheritance’ Tax on giving or leaving anything above £285,000 – oppose reform of ‘Inheritance’ Tax or call for its abolition, they are effectively impoverishing their own children in relation to others who stand to inherit, tax-free, unbelievably vast unearned fortunes. They are also denying the great majority of the next generation of young adults throughout our country something of the capital start in life they rightly wish to provide for their own young adult children.
It ought to be more widely known how many, varied and unlimited are the exemptions from ‘Inheritance’ Tax for the wealthy. Gifts and estate assets still scandalously exempt from ‘Inheritance’ Tax, after ten years of New Labour government, include the following, in unlimited amounts:
Lifetime gifts made seven years before death (Rupert Murdoch recently gave each of his children £50,000,000)
All interests in unincorporated businesses
All interests in unquoted trading companies
Half the value of controlling shareholdings in quoted companies
Half the value of land, plant or machinery used in qualifying businesses
All agricultural land ‘in hand’ of farmers
Half the value of landlords’ tenanted land, or all the value if the tenants can be kicked out within two years
Woodlands – until the timber is sold or cut
Lloyds Names’ funds at Lloyds
Alternative Investment Market (AIMs) quoted shares, treated in a classic Inland Revenue Capital Taxes Office one-liner as ‘unquoted’ for the purposes of these exemptions
Half the value of capital gifts into discretionary trusts, or the full amount if within the lifetime gifts exemption.
Reform is urgent. As fair minded donors – no doubt including Rupert Murdoch – would agree, all these unlimited amounts of transfers to the next generation should pay a flat 10% instead of 0%, and then beneficiaries should pay a progressive Lifetime Unearned Capital Receipts Tax, starting at 10% but paid only after deducting the flat 10% already paid by donors and estates. A £10,000 British Universal Inheritance for all British-born young citizens, naturally from all ethnic backgrounds, financed by and subject to this taxation, is already the policy of the Liberal Party (not the EU-fanatic Lib Dems). This is in effect a negative and progressive Unearned Capital Receipts Tax, with consequent net personal tax exemptions for receipts up to £90,000, which is roughly the average wealth of every adult and child in the country. The Green Party may be on the way towards a similar policy. Unlike New Labour’s flawed Baby Bonds/Child Trust Funds, British Universal Inheritance would be payable now, not in 18 years’ time and would be the same for all at 25 regardless of parents or families. Let blinkered socialists oppose all privately owned capital. Let blinkered conservatives support unbridled elitism. But no politician or political party can genuinely call for ‘Opportunity for All’ without supporting this proposal for the wider spread of the private ownership of wealth in each new generation, more home ownership, more new businesses, less financial exclusion, less need for income subsidies and – vitally important at this time – a greater sense of national community and identity. There is no time to lose.
IHT is a blind tax, Blind is as much as there is no means test involved. This I think is unfair. We run an estate planning company and I have just returned from seeing a 60 year ol lady who son lives with her, he is partially disabled and they look after each other. She has not got that long to live and her son will have to sell the only home he has known to pay the inheritance tax bill. This to me is wrong!
Where as if the couple were married they could pass the house between them under spousal exemption they cant. I can’t even use a clever trust as we would with a married couple to minimise the effect on second death.
This to me is wrong and as an experienced estate planner this is where I think IHT falls down badly.
Harry
A small flaw does not make a bad tax. It makes a flaw in need of correction. That’s all. This is a flaw. I accept that. It should be changed. These family situations should be recognised in law. But there is no way that they invalidate IHT as a whole.
Richard
[…] let’s ignore everyone who says this is double and triple taxation. That’s rubbish, as I show here. And, if we are to avoid capital gains tax charge on increase in property prices during a […]
[…] let’s ignore everyone who says this is double and triple taxation. That’s rubbish, as I show here. And, if we are to avoid capital gains tax charge on increase in property prices during a […]