Tax Research UK

Simon Jenkins wrote this in the Guardian today. His logic is sound. I’ve added paragraph breaks:

For half a century home ownership in Britain - termed a “right” by Brown - has been indulged beyond economic reason.

It has sucked savings out of the productive sector.

It has tied up pension money that should be helping the economy in the stock market.

Its tax reliefs have immobilised young people who, in most countries, remain in the more fluid rented sector until later in life.

It has led to mass hysteria with every price rise or fall.

Housing sees the British, their rulers and their newspapers, at their most innumerate and irrational.

This is why, for example, the argument that Inheritance Tax thresholds should increase because the owner of a ‘normal house’ might pay that tax is irrational. But politicians simply bow to the pressure.

And the young people in our country pay the price.

Richard Murphy Economics, Inheritance Tax

I spent some time discussing Inheritance Tax here last week.

Now there’s the resounding evidence that most people neither care about it, or think it has any relevance to their lives. 90% of all adults in the UK do not have a will.

If you were the remotest bit worried about Inheritance Tax you would. So they’re not. The evidence is clear.

The Tories have got this wrong. And people realise this is only a tax on a small minority in society. The only one’s that John Redwood thinks matter.

Richard Murphy Inheritance Tax

My media day continued. I did Radio Wales tonight with Matthew Elliott from what is called the Taxpayer’s Alliance.

He spoke complete nonsense. Like the speaker earlier in the day he thought inheritance tax was paid on small businesses. Where do these people come from?

Then we had the argument:

People don’t like this tax

Which is quite absurd. No one loves taxes. I don’t. But I do like what they do. So it’s an absurd question to ask if people like any tax, or not. Of course the answer will be that they don’t.

But worst of all is the usual twaddle he peddled that Inheritance Tax is triple taxation (apparently it’s income tax, stamp duty and Inheritance Tax). There are two answers to this:

1) There is lots of triple tax in this country. Take earnings form employment spent on alcohol: that’s income tax, national insurance, VAT and alcohol duty for starters. So we have quadruple taxation. So what? This spreads the tax base. That’s the basis of good tax design.

2) It so happens there isn’t triple tax on a house included in an estate charged to inheritance tax. First of all it’s the estate that is charged, not the house. So that’s only one tax. But even if the whole estate were a tax then a) the house will almost certainly represent an inflated value probably hundreds of times the total paid for the property if the deceased is of actuarial life expectancy. I recall , for example, my parent’s first house cost under £2,000. It must be worth more than a hundred times that now. If included in their estate now the increase in value would never have been taxed, the amount subject to income tax to pay for it would have been less than £2,000 and the stamp duty under £100. That’s not triple taxation. Given the generous allowances for Inheritance Taxation that’s much less than single taxation.

So let’s stop the misrepresentation and get down to the facts. The reality is that the argument about Inheritance Tax is about greed: people saying “I want to keep all the cash and want none of it to go to the State to create greater social justice and opportunity for those who might never be in the top 7%” (and that’s 93% of people, by definition). And greed is always ugly, which means it’s hidden behind lies and false arguments. .

Second, let’s be thankful that at least one tax might be slightly deflating the housing market. After all something has to do so because anyone under 35 now relies on having wealthy parents to buy a house. Nothing could crush the enterprise spirit more than this. What the Tories need to realise is that if every penny you have has to go into paying for a house, there is no chance of taking the risk of starting a business. You’re in the drip of death of a debt for life (and mortgage by the way means ‘grip of death’).

But despite this the Tories want to abolish the only tax that is doing anything to stop this economic and social madness. I despair.

And I’ll be candid: I distrust their motives. Because I don’t think they’re fools. And if that’s the case then they know all I’m saying is right. Which makes their presentation of their tax policy far removed from the substance of the policy they’re really pursuing, which is one of tax cuts for the rich of the sort Bush pushed through in the States at the start of this century, and which has created so much harm and not one jot of benefit there.

Richard Murphy Economics, Inheritance Tax, Tax management

I’ve just done Radio 5 Live. We were meant to be discussing inheritance tax.

Scheduled start time was 9.00. On air time was actually 11.45.

Then I was pitted against Sylvia Tidy Harris, a woman best noted for saying no-one should employ women below aged 45 as they might have children.

She presented two scenarios where she said inheritance tax might be due. First case:

Two young people start in the City on salaries of £35,000 each and buy a house together worth £300,000. Immediately they’re chargeable to inheritance tax.

This is what’s wrong with this:

1. It’s not related to real life - a tiny proportion of people start on £35,000. The average wage is £27,000. This women is a fantasist to think this is normal.
2. These people would have a mortgage of maybe 100% of the value of their home. That’s offset against it’s value for inheritance tax. So net worth is zero. No inheritance tax due.
3. She interjected:

No, their parents bought them the house

Now we have a new scenario. They do have an asset worth £300,000. But it’s shared. So that’s £150,000 each. So there’s no inheritance tax. It starts at £285,000. And let’s also be clear. They’ve got to die first. Not likely.

So, we move on to her second claim. This is:

A person owns an ordinary house worth £200,000 and a small business worth say £150,000. It’s so unfair they have to pay inheritance tax.

Which is why, of course, they don’t owe any. All small unquoted businesses are exempt from inheritance tax.

In other words this person had no idea whatsoever what she was talking about and had the nerve to go on national radio and talk about it. I was furious. I fear it showed.

But is this the propaganda the Tories will resort to to get tax cuts for the rich? I think so. Sad, isn’t it?

Richard Murphy Inheritance Tax

Extraordinary headlines have been used to report the UK Institute of Directors’ (IoD) new report on capital gains tax and inheritance tax. For example, Accountancy Age has said:

The Institute of Directors has called for the threshold for CGT to be lowered, and for the tax to be simplified, to enable more tax to be raised.

That’s simply not true. The proposal is actually quite clear. With regard to Inheritance Tax it says:

Inheritance tax (IHT) has come to impose a significant burden on many families which do not have great wealth. It has come to be a tax on thrift, at a time when it is crucial to encourage saving, rather than discourage it.

It provides no evidence that IHT is a tax on thrift. Nor does it prove that there is a need for additional saving which might be subject to the tax (pensions, for example are not and that seems to be where the savings shortfall is). On CGT the proposal is as clear:

The main simplification of CGT is to replace the current two scales of taper relief, under which the taxable proportion of a gain diminishes as the period of ownership of the asset increases, with a single scale. Crucially, if an asset had been owned for long enough, the gain would not be taxable at all. Thus no computations would be needed for assets that were held for the longer term. The proposal is to tax 100% of a gain if the asset has been held for up to a year, 90% if the asset has been held for one to two years, 80% if the asset has been held for two to three years, and so on down to taxing none of a gain if the asset has been held for more than ten years.

Let’s be clear. What that’s saying is in the short term there are no such things as capital gains, there are only profits from trades. That seems entirely reasonable. But the obvious corollary is that real capital gains should be tax free. In other words, in all but name they’re saying capital gains tax should be abolished as well, with gains short term gains being considered trading profits. This is unsurprising. Their conceptual framework for capital taxes is this:

Objective 1: to make a reasonable contribution to total public revenue.
Objective 2: to avoid an imbalance between the taxation of returns in different forms, for example income from investments and capital gains on investments.
Objective 3: to accomplish objectives 1 and 2 simply.
Objective 4: not to discourage saving too much. Savings by individuals mean that they can avoid being a burden on other taxpayers later in life. Saving is an act of social responsibility, as well as benefiting the saver.
Objective 5: not to discourage investment too much. People should not be put off investing in businesses which have a prospect of doing well and delivering significant returns to investors by the thought that if those returns materialise, they will be reduced by a large tax bill to a level that is not commensurate with the risk taken. The productive use of money in the private sector is crucial to economic growth.

Plain straightforwardly, that’s wrong. First of all, point 4 is simply incorrect. The savings so described are pensions, and are never subject to capital gains tax or IHT and do enjoy generous income tax reliefs. The only issue on IHT at the moment is that some people are paying tax when they sell the family home as a deceased generation no longer needs it - which means the value is as much open to charge as any other asset and serves to limit the absurd growth in house prices which are already fuelled by capital gains tax relief in this area. Second, point 5 is wrong as existing rules on CGT are much more generous to genuine risk taking investment than this proposal, and IHT is not charged on investment in genuine risky enterprises. So the claims made are rhetoric, not fact.

That’s true of this objective statement as a whole. It is, in fact, simply wrong. Capital taxes exist for the following reasons:

1. To tax wealth which otherwise avoids any form of taxation, so broadening the tax base;
2. To ensure that the tax base is progressive;
3. To provide for the reallocation of wealth and the reduction in the gap between the rich and the poor - which is enormously socially destructive;
4. To prevent leakage from income tax;
5. To raise revenue.

The IoD is dressing up a straightforward desire to remove tax on the wealthy as somehow having a logical structure and philosophy behind it. Their arguments are hollow. Their naked greed is apparent. Their indifference to passing the tax burden onto those less able to bear it is noted.

Perhaps the report’s cover says all that needs to be known about the IoD’s real thinking. Tax is not a bomb that threatens people. Tax is what underpins the social structure of our society and provides people with the opportunity to thrive.

Richard Murphy Economics, Inheritance Tax, Tax avoidance, Tax management

Stephen Byers has responded to Polly Toynbee’s article in the Guardian newspaper in which she attacked his plan to abolish inheritance tax, on which I have already commented. And he comes up with a classic argument for abolishing inheritance tax. He says:

"Toynbee claims that, at a time when City dealer’s bonuses are soaring and mid-ranking bankers are due a £1.5 million top up on their salaries, it is vital to keep one of the few instruments that spreads wealth more fairly. Yet she must know that it is precisely the super rich who, along with the well-established landed gentry arrange their financial affairs so that, quite legally they avoid paying (inheritance) tax."

So, Byers (and we can take it as read therefore that Blair agrees) thinks that the existence of tax planning is sufficient to negate all attempts to impose taxes that might redistribute income or wealth, an argument to which we previously knew George Bush subscribed but which now appears to have permeated the New Labour camp. Goodbye social justice then in the face of wheelers, dealers and dodgers; no mention being made of the possibility of reforming the tax to tackle such issues instead.

Far from it in fact, for Byers goes on to enjoin:

"Toynbee should listen to the informed view of Chris Wales, a former adviser to Gordon Brown on tax policy, who says that inheritance tax has a negligible effect on the redistribution of wealth."

I’ve mentioned Wales before as well. Byers forget to mention in his article Wales’ former service with  Andersens (where no doubt he did his bit to prevent wealth redistribution, that being the mandate of such firms). He also forgot to mention another chapter in Wales’ career which has relevance in the context in which Byers wrote. When he left the Treasury Wales joined Goldman Sachs, one of those banks paying bonuses of the order indicated. Could it just be that Wales has a perspective on these issues that is, shall we say, a little out of the ordinary given his former employments, and that the selective mention of his work as a former adviser to the Chancellor may be spin?

Whatever it is, Byers proves quite convincingly why he is out of office, and why I would not be surprised if New Labour follow him.

Richard Murphy Inheritance Tax

Accountancy Age covered the Inheritance Tax issue whilst I was offline. I note they say that there is an increasing body of opinion mounting against the tax, and that I seem to be  the sole voice they could find in favour.

Well, there are occassions when it is good to stand out from the crowd. This is one of them.

Richard Murphy Inheritance Tax

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.

Pollu Toynbee wrote an excellent response to Byers for the Guardian. I recommend it. I once had little time for Polly Toynbee, which was when we worked together. I have to say these days she’s really on form.

But the most interesting thing is the response of Chris Wales to Toynbee’s article, published as a letter in the Guardian. Wales (who I know) is, in his own words ‘Former member, Treasury council of economic advisers; adviser to Gordon Brown on tax policy 1997-2003‘. For the record, he’s also a former Andersen’s partner, is rather proud of his doctorate, which is actually in mediaeval history, and was when last I heard, seeking employment. But it’s his closeness to Brown that is important. He says:

The reality is that it is a low-yielding tax ….. makes no political or economic sense.

He adds:

The tax system works best when it goes with the grain of the economy. Inheritance tax doesn’t. There is no doubt that it will be abolished.

And continues:

Let’s be clear. This is from the man who already reduced capital gains tax to 10% in most cases, and put tax on pension funds to compensate - his two big achievements, both of which shifted the burden of tax onto the less well off. And this is from a  man who has told me he is convinced the UK must have a 15% corporation tax rate. And who now wants no inheritance tax.

Do you see my drift? Brown’s favoured tax adviser for more than 6 years was intent on ensuring the tax burden on the well off was reduced and that on ordinary people was increased. Which, by the way, is exactly what Byers’ favoured reform of Inheritance tax would also do since he would levy environmental taxes on all as an alternative to Inheritance Tax on the very few who have the means to pay (always, since it’s almost always charged on the dead, and they have no further use for cash).

Does Brown’s choice of adviser tell us a lot about the man? I admit I rumbled Wales the first time I met him (and he, I think likewise, me). Nothing has ever convinced me of the coherence of his thinking, let alone his proclaimed Labour credentials. His latest comments do not increase my confidence.

Richard Murphy Inheritance Tax

My good friend Neasa MacErlean from the Observer had an interesting article in yesterday’s paper. As she put it:

Wealthy people over the age of 75 who are looking for an alternative product to an annuity could be in for a shock: the government is considering clamping down on one such product, known as the ‘alternatively secured pension’ plan.

ASPs, introduced on 6 April this year, allow people to leave their pension funds invested after the age of 75 - rather than forcing them to buy an annuity.

And for some people, as she noted, this is a really important issue:

ASPs were originally designed for religious groups such as the Plymouth Brethren, who have moral concerns about annuities. They would see an annuity as a mortgage upon a soul, ‘a way of undermining the challenges God sets by keeping secret from human beings the date of their deaths’.

But guess what? Again, to quote Neasa:

Now, however, only four months ASPs were introduced, the Treasury is considering calling a halt to them. Tax experts, it believes, are advising some clients to take out an ASP in order to pass on a pension fund to dependants and therefore avoid inheritance tax.

And who is objecting?:

Tax advisers are outraged at the possibility of a government U-turn.

Baker Tilly are named.

But as the Treasury say:

‘We introduced this special concession for a very small group of people for a specific set of religious reasons, and it is unfortunate that a group of tax avoidance advisers are wilfully seeking to abuse it. We will take all action necessary to clamp down on this abuse but, if it persists, we will unfortunately have to remove the concession entirely. It is unfortunate that the same tax advisers who always complain about blanket legislation then regularly seek to exploit any concessions and reliefs that we introduce.’

As usual, tax advisers are intent on spoiling the show by going for the ‘legally possible’ option. Ethically it’s time this was stopped. But you can be sure, the advisers won’t be doing it.

Richard Murphy Ethics, Inheritance Tax, Tax avoidance

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:

1. all gifts to your spouse
2. all gifts made more than seven years before death (if they’re genuine)
3. almost all business and agricultural assets
4. all gifts to charities
5. 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:

1. it has not been taxed before;
2. 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.

Richard Murphy Ethics, Inheritance Tax, Tax management