Inheritance Tax » Tax Research UK

Choose your advisers with care

Aug 232006

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:

There is a strong case for a broad review and public debate about the taxation of capital and inheritance tax should be considered as part of that process.

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.

Tax advisers abusing the system

Ethics, Inheritance Tax, Tax avoidance 5 Responses »

Aug 212006

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.

Let’s be clear – Inheritance Tax is not double taxation

Ethics, Inheritance Tax, Tax management 18 Responses »

Jul 312006

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.