The Independent has reported that Sajid Javid has sympathy with a long held Conservative Party desire to abolish Inheritance Tax.
I understand his desire. Inheritance Tax has long outlived its usefulness. But, I would replace it with an effective tax system on wealth and not simply provide the annual give away of more than £5 billion to those who, by definition, are already wealthy that abolition would result in.
Let me go back to basics. Inheritance tax, which was previously called Capital Transfer Tax, which had in turn replaced a tax with a very long history called Estate Duty in the 1970s, has the goal of taxing wealth at the time of a person's death. At this point in time it can generally be suggested that a person has no further use for their worldly possessions: the aim was then to make such a tax as uncontentious as possible. The aim haws apparently failed: according to our Chancellor this is our most hated tax, but that might say more about who he talks to than provide evidence that this is actually the case.
The object of the tax is indisputably to be a wealth tax. In this it very largely fails. Gifts made seven years before death are ignored, and the most wealthy are those most likely to be able to make these. There are also exceptionally generous reliefs for agricultural and business property, both of which are most likely to be owned by the most wealthy. Historically trusts and other arrangements, many of them still in existence, also significantly reduced the scope of the tax. As a wealth tax it is a failure.
So what can be done, assuming that we need to tax wealth - which all the evidence of growing wealth inequality suggests that we should - with which suggestion the IMF and OECD would agree?
My suggestions are fourfold. First, we need effective measures to tax the income derived from wealth. I have proposed a range of such measures, here.
Second, given that by far the largest part of wealth passed on death is private housing, the most effective way to bring this portion of wealth into tax on death is to charge capital gains tax at that time. This charge would be based on value at sale time less cumulative life time costs of acquiring property ignoring transaction costs. Provision would be needed to cover sale before death and the charge would have to apply to the second death in couples, with safeguards for genuine long term careers, but this one change would achieve the goal of taxing much of the wealth that is of concern.
Third, a capital gains tax charge on other assets passed at death, including agricultural and business property would achieve most of the rest of this goal. Again, anti-avoidance rules would be required.
But fourth, and most importantly, we must instead of having an Inheritance Tax look at taxing the receipt of gifts during life. It is absurd that we charge wealth to tax only at the time of death, and irrespective of how many people it is shared between. Our goal should be to reduce wealth inequality. In that case the aim should be to encourage assets to be shared as widely as possible and that means people should be charged to tax on their cumulative inheritances received, and not the gifts that they make. Such a transition will take time to design, plan and introduce and the first three points noted above could address many of the problems in inheritance tax in the meantime, and make it more equitable. But ultimately the idea that death is the only time that we tax wealth is wrong and the tax system has to reflect that.
We need real reform on inheritance tax. I doubt the Chancellor has those reforms that we really need in mind. Those who might seek to replace him should consider the issue in that case.
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Amazon doesn’t send me my order until I have paid for it. Fair taxation tax is the price (a membership fee) to society. When income and wealth inequality is high, IT is essentially redistributive.
I’d suggest that Inheritance Tax should be maintained until we know that a still-to-be changed/supplemented tax system verifiably reduces obscene levels of wealth and income inequality. When wealth inequality is reduced to acceptable levels then (perhaps) Inheritance Tax MIGHT be reduced or abolished.
Chances are that wealth inequality will not reduce quickly enough or in extent. Therefore inheritance tax should continue for the foreseeable future, perhaps at a higher threshold and at a higher rate.
Abolition can only happen if replaced by something more effective
I agree and tried to say exactly that, but Sajid Javid might not see it like that. He seems to think his job is to let the rich keep as much of their wealth as possible.
[…] Murphy of Tax Justice UK has […]
qwertboi says:
“…… Sajid Javid […] seems to think his job is to let the rich keep as much of their wealth as possible.”
That is kind of what you’d expect a Tory chancellor to think…. wealth cascading down through the generations is how John Major described it. Unfortunately poverty behaves the same way.
Is it not unreasonable to abolish inheritance?
I think that would be unreasonable
All makes sense Richard but I doubt that this is what SJ wants the party faithful to understand his proposals in this way.
Taking your comments in a order:
Firstly, I agree that this is an income tax question not an IHT one. I have no beef with your earlier comments on income tax.
Secondly, the problem is uncapped PPR relief from CGT. This relief should not be scrapped but should be capped at somewhere around the median homeowner. Figures like £50k plus £5k for each year of ownership feels about right but I’ve made no attempt to do the maths.
Thirdly, of course the CGT-free uplift on death is inappropriate. Transfers on death are disposals and should be treated as such for CGT purposes.
As an aside, I’d also like to see the cessation of residents triggering a deemed disposal and reacquisition at fair value for CGT purposes. It might sound weird in a UK context but other countries (e.g. Canada) do it without too many problems.
Fourthly, gifts and bequests should be taxed as UK source income of the recipient but with a lifetime allowance of (e,g.) £100k per individual (only for UK residents).
Wealth inequality should be tackled well before tax is an issue – people should be paid or have wealth based on their worth to society, if greed and selfishness is continually rewarded, then you are going to encourage sociopathic tendencies and the self-reinforcing notion of entitlement to privilege – which encourages tax avoidance. I do not believe that any two people are so different that one can ‘earn’ £10K a year and another £600K. The value placed on any work is arbitrary, and not in favour of those that actually do the work that keeps an economy healthy. In an ideal world inheritance tax would never be needed, everyone would have contributed their fair share throughout their lives, and could safely pass on their worldly possessions in the knowledge that the next generation will be contribute as well. I don’t understand the mentality of anyone raking in millions in a year, and think they deserve more, but can’t see that e.g. a care worker should maybe recieve more than a pathetic minimum wage – it’s sick and society is sick if it functions like that. And I’m sick of it.
[…] Murphy of Tax Justice UK has […]
Looks more likely that all taxation of the wealthy will be ended, and replaced by higher taxation of the less-than-wealthy, soon!
We could soon be a country where the general population exists solely to worship the elevated classes by throwing money at them!
Interesting that (generally) those that are most against inheritance tax are also in favour of free enterpise on a level playing field….
brian faux says:
” those that are most [..] in favour of free enterprise on a level playing field….” generally enjoy playing down-bank with the win behind them. 🙂