Tax Research UK

The Fairness of Inheritance Tax « Bad Conscience.

Worth reading.

Paul Sagar is a young man with his head screwed on.

Richard Murphy Inheritance Tax

So the Tories want to effectively increase the Inheritance Tax limit to £2 million.

How does that fit with a drive for greater equality?

Who is George Osborne kidding?

Richard Murphy Economics, Ethics, Inheritance Tax

I mentioned yesterday that the IFS did not appear to think that wealth was a basis for charging tax. Now I know why. This is what the they say in their report on Taxation of Wealth and Wealth Transfers:

Given that the justification for double taxation is arguable and that inheritance tax currently raises less than £4 billion a year, consideration could be given to abolishing it altogether. Regardless of whether or not a tax on wealth transfers is retained, the current rebasing of assets held at death to market value for capital gains tax purposes should be removed. In other words, capital gains should be taxed at death, although payment could be delayed until the assets are sold. This would make the double taxation implied by inheritance tax (if retained) very explicit, but double taxation is a natural feature of any taxation of wealth holdings or wealth transfers and, if justified in its own right, does not provide a rationale for not fully taxing the income (or capital gain) received by donors. Some design issues such as emigration and immigration, gains on business assets, private residences etc. would need to be resolved if capital gains tax is imposed on death and are discussed in the chapter.

They add:

The paper does not advocate the introduction of a regular wealth tax.

So now we know: wealth should not be taxed. Another £4 billion of revenue is lost to the State.

Except it’s more than that. Let’s be clear: Inheritance Tax is already heavily avoided by the wealthy, but it is still only paid by 7% of estates and despite paranoia on the point, this is unlikely to rise. Current movements in house prices are certainly helping many estates fall out of the tax.

The suggestion that Capital Gains Tax effectively apply on death does not help the middle classes though. First, whilst houses are exempt for Capital Gains Tax many other assets (cash apart, of course) are not. And there’s no suggestion of an increased Capital Gains Tax allowance in these cases. So it is those who will have to sell what they inherit that will pay the highest rates of tax under what the IFS proposal - and for some people the level of sale may be quite small before a tax charge hits - certainly much smaller than is the case with Inheritance Tax now. In that case smaller inheritances will pay more and those who can afford to defer sale can avoid tax indefinitely - and by definition those best able to do that will be the wealthy.

It’s another case of the Institute for Fiscal Studies moving tax onto those least able to pay it.

So much for it’s lack of bias.

Richard Murphy Ethics, IFS, Inheritance Tax

Reuters has reported that:

A group of Labour MPs and academics has challenged Gordon Brown to get tough on inheritance tax (IHT), calling it a vital tool to reduce social inequalities.

Quite right.

Richard Murphy Inheritance Tax

Executive summary

A massively missed opportunity. The last thing we should expect from a Labour Chancellor. A political mistake - an admission that the Tories are indeed setting the agenda, and entirely for the benefit of their natural supporters.

Inheritance Tax

The one clever move in the PBR was to allow couples to use each others allowances. It kills the market in tax planning in this area and stops the accusation that only the rich can afford to avoid this tax. But it will cause harm. There will be less wealth redistribution. The housing market will continue to grow as less tax will be charged on house price increases. Overall, a mistake. He could have created partially transferable allowances quite fairly. And the rules on this will be complex - you can be sure.

Non-domiciles

The plus - he did something. It is now recognised that there is a problem. The other plus - he’s left the mega-wealthy as the abusers which makes it even easier to attack the injustice of this in the future. Otherwise, a complete lost opportunity to end an abuse, to raise money to tackle child poverty and to bring the UK into line with the rest of the world.

The issue will not go away. Expect an attack from Europe now. It is very obvious now that the UK is operating a harmful tax practice.

Overall, a massive disappointment and a political complete own-goal. It will backfire.

Capital gains tax

The biggest mistake in the whole budget. I’d called for a 20% rate of tax instead of the 10% one - but the 18% rate on all gains creates massive tax planning opportunities for accountants - so watch the abuses rise - and creates an incentive for people to speculate and not create wealth. In economic, accounting and political terms a straightforward disaster. And it does not nothing to tackle private equity.

Private equity

Because the non-dom rule stays for the wealthy and because the income of private equity partners is still going to be taxed as capital gains the reality is that he has done nothing of any consequence at all to tackle this abuse. So much for the Prime Minister’s words saying the loop hole would be shut. He clearly cannot identify a loophole, and that after ten years at the Treasury.

Small business

As predicted, the abuse of paying dividends without underlying economic substance in this sector is to go. I have written on this already, here. Expect a massive backlash from the small business sector, but reform here is required. The trouble is, on this track record, he’ll bodge it by ducking the real issues.

PAYE and NIC

There had been a call for these to be merged. They won’t be. At an admin level this is an opportunity lost. The protection of pensioners could have been managed.

Overseas aid

At last - some good news. But please spend it wisely - and it must not be linked to UK exports.

Richard Murphy Accounting, Domicile, Inheritance Tax, Private equity, Tax management

There’s a very good defence of Inheritance Tax under the above title in the New Statesman, written by Martin O’Neill.

Recommended.

Richard Murphy Ethics, Inheritance Tax

I am bemused by the Observer’s Cash section. This week they launched their campaign against Inheritance Tax with the headline:

‘Wicked tax’ that hits the bereaved

I wrote for ‘Cash’ for some time. I know those who are writing this stuff. I have argued with them about it. And I can find no substance to their reasoning. I conclude it’s cynical pandering to the British middle classes at their worst.

Even their own former editor, Will Hutton can find nothing to support their argument. He wrote this weekend about (quoting his headline):

The case for keeping inheritance tax

Unlike the Cash team, whose only line is that the tax is unfair on co-habiting siblings, which requires a minor change in the law, not a description of it as ‘wicked’, Hutton is in possession of facts and arguments. Take this:

Only about 6 per cent of the value of inherited property in Britain is paid in tax; less than in most other countries, much less than we paid even 25 years ago, and much less than in feudal England. This should be a cause for concern, not for lowering it still further.

And this:

Rather, the take should be raised and the loopholes closed that let much property to be held offshore.

The economic benefits are clear. More property would have to be sold on death to pay the tax, easing house-price inflation and giving people the chance to buy property that otherwise would not come on the market. Farmers in my grandfather’s generation won the chance to buy farms after the war when estate duty was high and land came on the market. No more.

Neither has any economic study managed to associate light inheritance tax with innovation, entrepreneurship or high business start-ups. Rather, the story is the opposite. Easy access to unearned wealth destroys the incentive to work and to experiment.

Put simply, if you believe in an enterprise economy, Inheritance Tax is a good thing. I agree.

The trouble is the British believe in privilege.

Richard Murphy Inheritance Tax

I’ve been asked how I could say as a practicing accountant that I have not done Inheritance Tax planning.

The answer I gave on the Moral Maze was, of course, instantaneous. But since then I have struggled to think when or if I ever offered advice on Inheritance Tax planning and can’t recall doing so over many years.

There are good reasons. First my client base have tended to be of an age where there was little inclination to do this.

Second, I have always been willing to discuss Inheritance Tax mitigation. But when doing so follow the maxim a doctor told me which was:

A good doctor knows how to operate
An excellent doctor knows when to operate
The best doctor knows when not to operate.

What I mean is this. I’d sit the client down. Give them a coffee. Listen to the misinformation they had on the tax and then talk through the facts with them.

First of all I’d show how little tax they might owe.

Second, I’d show how much they could leave after tax.

Third I’d discuss when they were planning to die. In most cases it was far off: too far off for any reasonable plan for financial security to be put in place.

Fourth I’d discuss how often law changes and would stress that anything we could do now would most likely be out of date by the time they died.

Fifth I’d explain that any planning would quite probably be expensive. And that cost might be on-going.

Sixth, I’d show that given the uncertainties no one could guarantee who would win from the planning, bar me. This reflects the serious concern I have about the motivation of many in this market - much of which I think unethical.

Seventh I’d explain all the allowances available in law (the use of which I would exclude from Melanie Phillips question - this is not planning - this is compliance).

Eighth I’d make sure they had a will that reflected their real wishes.

Ninth I’d remind them that gifts to charity were tax free.

And after all that we’d had several coffees and they would have decided there was nothing more they wanted of me bar a letter summarising what we’d discussed that they could give to a solicitor to make sure their will was updated.

Now if that’s planning I gave the wrong answer to Melanie Phillips.

But I think she meant ‘avoidance’ by the term she used. Ensuring people comply with the spirit of the law, which is what I think I’ve explained above is principled (as she said I was). It’s avoidance that is not.

And I’ll say this. I never had a client complain. And they happily paid for the advice.

Richard Murphy Accounting, Ethics, Inheritance Tax

George Osborne proposes to raise the Inheritance Tax limit to £1 million so, as he puts it, the family home is not subject to this tax.

The UK is a country suffering an increasing poverty gap. As example, the proportion of wealth held by Britain’s richest 10% has increased from 47% to 54% in the last ten years.

The reason is simple. We do not tax people’s houses. As a result they have rocketed in price. Now the only young people who can get onto the housing ladder are those whose parents can help them.

Osborne’s tax change would only exaggerate this trend - giving more help to those who already have homes whilst denying those on low income and with no wealth any chance of getting on the ladder at all.

This path leads to economic apartheid between a country of ‘have homes’ and ‘have no homes’. Inheritance tax has been the sole bastion for redistribution of wealth that has helped prevent this outcome. Removing the tax from homes will simply guarantee some will never get one.

Is that what George Osborne calls tax justice? If it is, I don’t.

Richard Murphy Economics, Ethics, Inheritance Tax

I continue to be bemused by some arguments put forward by those who argue against Inheritance Tax. In particular I am completely baffled by the argument that an average home should be free of Inheritance Tax when almost no one who inherits a house moves into it. Let’s be clear: houses in the estates of deceased people simply represent cash in 98% of cases.

But I thought I’d explore this some more in a video:

Richard Murphy Inheritance Tax, Tax Research TV