I read a pile of complete nonsense about inheritance tax yesterday. It was included in an email sent to me by somebody called Nigel Green, who is the CEO of an organisation called the deVere Group, which prides itself on being an international wealth manager.
You can imagine, as a result, that Mr Green is not a great fan of tax in any form, and this is what he had to say about potential changes to inheritance tax in the UK:
“Inheritance tax is the most resented tax we encounter – and for good reason.
“It's viewed as a double taxation on assets that have already been earned, saved, and taxed over a lifetime. With the Treasury facing intense pressure to raise revenue, it appears almost inevitable that this tax will be targeted again.”
I found this amusing because he says, as if it is the objective truth, that inheritance tax is the most resented tax that he encounters. However, the fact is that it is still paid by fewer than 5% of estates in the UK. All he is actually saying then is that, amongst the people who go to his organisation to find ways to avoid paying inheritance tax, inheritance tax is the most resented tax.
That, of course, does not mean that it is the most hated tax within society, or that it's even hated very much at all. It simply means that he is forming his opinion based on an incredibly biased sample.
And the evidence is that this must be the case. Inheritance tax payments are currently at record levels, suggesting that either most people are quite happy to pay it, accepting it for what it is, or that the advice available on how to avoid it is not very good at helping people get around it. But whatever it might be, it is clearly not hated so much that most people get out of having to settle their obligation to do so.
In that case, let me look at his other claims, and in particular that inheritance tax is a double tax charge. This claim has been around for a long time and is popular with inheritance tax advisers, but the evidence to support it is weak.
It can be fairly said that VAT is a double tax charge. It is a charge on consumption paid for out of income already taxed.
It can fairly be said that income tax and national insurance double up on each other in the case of earnings from employment.
You can also argue that the way in which the corporation tax system now fails to properly integrate with the income tax system (when, once, the two did with each other remarkably well) creates a slight double tax charge on dividends, although I am not especially worried about that.
But what is almost impossible to say is that inheritance tax is a double tax charge. There are several reasons for saying that.
Firstly, capital gains tax is not charged at death, and therefore inheritance replaces it, albeit to a rather limited degree in the sense that only 5% or fewer of states actually settle up the liabilities that they might have, meaning that in a great many cases, inheritance tax might represent a considerable relief from capital gains tax. It is very odd that Mr Green ignores that fact.
And, it can also be fairly said that the majority of the wealth that most people who are now dying have did not arise as a result of their efforts at work, or their savings, because most of that wealth has been created by inflation and does, therefore, represent gains which are entirely and fairly subject to a tax charge as a result because they have never been charged before. As a matter of fact, if you have wealth that you have done nothing to generate, then you should expect to be taxed upon it because it is the greater economic environment that has enhanced your well-being, and you have not.
In addition, given that there are still very generous reliefs for unquoted businesses and farms (and I am aware that some might think that those comments are provocative, but I think the suggestions are accurate), then there is actually still, the present, a failure to impose inheritance tax fairly in the case of many estates.
And, given the ease with which inheritance tax is avoided by some, and most especially the very wealthy, there is a very good case for arguing that inheritance tax is, in fact, an example of under taxation, rather than double taxation.
Mr. Green, therefore, is in fact just a typical inheritance tax planning financial advisor, putting forward a view which most definitely suits his own business purpose, and his own pursuit of profit by creating fear when none is required, to encourage people to seek advice which, I think, many people would be better off without. That is because, as my own experience as a practitioner proved, a great many people who pay for tax avoidance advice actually hate the proposals put to them and would much rather go for a simple life and avoid the onerous conditions placed upon them by tax advisors created in desperate attemtps to avoid tax but which constrain real life and its actual priorities. They would actually prefer to pay the tax and live as they wish. That is why I chose not to participate in the purveyance of such schemes when I was in practice, and my clients liked me for it.
Mr. Green's clients might think otherwise, but I can also say that I met many people who had visited such firms and then changed their minds, and then sought my advice on how to settle their taxation liabilities free from the artificial constraints that tax planning imposed on them.
So, I think we should, in that case, dismiss what Mr Green has to say because it is very obviously being promoted in his own self-interest, and it is very obviously in conflict with the best interests of the society that hosts his activities. He and other such lobbyists are not speaking objectively about taxes. They are simply promoting their own gains that might be derived from planning for them, and that means that they are decidedly biased witnesses when it comes to this issue, and biased witnesses are never those to whom we should pay much attention.
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Is a gain created by inflation really a gain? I would say not as would many people I think.
You mean growth in the price of an asset is not a gain? How?
If the costs of anything and everything that you wish to buy with the proceeds of that asset have gone up by even more.
So?
And, as a matter of fact, they have not.
Asset inflation has been higher than ordinary inflation.
So, what are you talking about?
And why should one receipt in your pocket be inflation adjusted and another not? I was first taxed in 1974, I think. Should my pay now be indexed back to 1974 prices for taxation purposes? Why?
To what extent though is the Inheritance Tax issue driven by the hike in Land and House Prices?
If we go back to the 80’s when a house was about 3x average earnings firstly you could buy one without needing the Bank of Mum & Dad and when they did die while a lump sum of between a year and three years earnings – depending on how many siblings you had etc was quite handy it was hardly life changing.
Now, however things are very different
I bought my first house in North London in the early 80’s for 24,000. I sold it 3 years later for about 33,000. In 1992 it was valued at over 300,000. Admittedly that area of North London had become much more desirable.
I think there is polling evidence that inheritance tax is the most disliked tax. For example https://yougov.co.uk/politics/articles/47940-why-do-britons-think-inheritance-tax-is-unfair
It is somewhat irrational, but people are not automatons. Even for people whose estates won’t pay it – which is far and away the majority of people – there is a fear that their estate might be diminished; that their children or other heirs might receive a smaller windfall.
Part of it is I think the connection with death. It is coming for us all eventually, but few like to think about it early.
Another part may be the relatively high rate – 40% of your assets is a large number which hasn’t changed for decades.
And the relatively low threshold. The £325,000 nil rate band was once increased with inflation each year but it has remained fixed since April 2009. If it was updated for inflation again since 2009 it should be about £515,000. Even that would be less than the average price of a house in London.
And then there is a perception that it is “unfair” somehow. There is the “double tax” trope. (Compare the number of taxes that are paid on a litre of petrol by the time it gets into your car’s fuel tank.) also perhaps many well-advised people can mitigate or avoid the tax to some extent that it is seen as something that falls selectively on the rest, when most estates don’t pay it at all.
To reverse things, if your estate is paying inheritance tax: congratulations. You are in the top 5%.
I like your last point
The thing about the threshold and the 40% rate is not only that 95% of the UK population are below that threshold, but also there are so many allowances that even of those that do pay inheritance tax, 95% don’t pay 40%. At current, real average rates, if you inherit a million pounds you are likely to pay less than £90,000 inheritance tax – you still get over £910,000 tax-free. That’s enough to buy outright 3 average UK houses and still have a £100,000 holiday. Oh and the rent from the two houses you don’t live in will give you a rental income of £25,000-£50,000 every year…
The idea that inheritance tax is double taxation is laughable, isn’t it ? It’s as if conservatives believe you can bring people back from the dead to charge them tax. Err… You can’t. It’s a tax on the gain the beneficiary has made, and no tax has been paid on it – unless any asset or money we receive is ‘double taxed’ because it was subject to tax when somebody else had it (which is, surely, true of almost anything – certainly any money).
But then conservatism is in the end all about fear of death – well, fear of change, which is at once a fear of both life and death. As Wallace Stevens put it: “Is there no change of death in paradise?”
I have a colleague at work Richard – very able, a good person to work with, helpful, honest, a real ‘mensch’ etc., but he was pulling his hair out about this the other day.
He has bought and sold properties etc., and he is trying to build wealth for his two children (he is divorced but takes his role as a father very seriously). He was quite irate. Now, I don’t know how much he is worth (he works for the local authority after all) but maybe he has a point?
All he is doing is doing what countless of thousands are doing around he country – trying to get on – funneled to using the property market – as he sees pension pots shrink, the CoL going up, essential services being cut etc., and worries about social mobility coming to a stand still – in fact already is, isn’t it? Life expectancy has already gone down (another suicide on the Midland Mainline south of Derby this week).
So, maybe we can amplify my colleague and think of thousand of others, ducking and diving, thinking exactly the same?
But why do they pick on IHT as if it alone is the great evil?
And why don’t they want to live now?
They’re living for tomorrow based on the uncertainty created by the present – the retrenchment of state protection from their lives – these are people who know the pension system is fucked; their savings underused and under rewarded, the rules stacked against them and they are working like good citizens in their view.
They see the power of money and worry that they do not have enough of it. I am not advocating on their behalf – I’m seeking to help find a way into their minds Richard!
What you say about the IHT “planning” sector of the industry I work in, Richard, is quite true. In 35 years in practice, I have never arranged a “discounted gift”, “loan trust”, offshore trust-based bonds, blah, blah. The reason? I could never square the circle as to who benefited the most – the client, the product promoter, or the intermediary. Hint: it was rarely the client.
I happen to think that IHT planning, should it actually ever be needed, is simple. Give away what you can, buy life assurance if you want to and can afford it and, back in the day (slowly returning to favor), spend some capital on an immediate life annuity to increase your income.
Oh, and accept that some IHT will be paid if you are worth enough when you are dead and don’t worry about it – just get on with living and remembering that warm hands are better than cold!
A great deal to agree with.
We are on the same page.
I would argue that the growth in inflation-adjusted price of an asset is a gain, but there is an argument that inflation-level gains or lower are not a real-terms gain. However, if we were to correct for that we would then need to generally change things like capital gains, most likely allowing gains to be adjusted for ‘losses’ from inflation price adjustments but then applying a higher tax level on ‘real-terms’ gains to balance.
I’ve spoken to people (such as my old next-door neighbour) who have read about tax grabs and are strongly against inheritance tax. They’re generally unaware that the size of their future estate would not incur any inheritance tax and much less against it when they understand who ends up paying it.
Meanwhile, those I know expecting to lose moderate amounts to inheritance tax are generally clear that they’ll still be hundreds of thouands better off once they inherit and therefore mostly fine with the levels they expect to pay.
At the other end, it seems to be mainly the wealthy, who currently have the means to divest themselves of much of their assets as unlimited gifts long before they die while retaining the same quality of life, and who may have to lose a more fair proportion of their estate in inheritance tax, who seem to be the most against the recent and proposed changes.
My Mum inherited a modest pension pot from my Dad tax-free, and therefore had an amount of money that had faced no income tax, no capital gains, no inheritance tax, nothing.
The wealth management side are very good at highlighting the worst-tax combinations of taxes and losses of allowances to suggest high nominal rates, but much more quiet about the percentage of total assets paid in inheritance tax for different levels of wealth, and I’m sure that would be illuminating about just how little tax many of the wealthiest families actually end up paying due to the many exemptions.
Why not charge capital gains tax, on the event of death? Then dispose of
Inheritance tax. With a proviso, that a spouse will receive the funds tax
free. Am I being too simplistic? Gifting might/will be an issue,
I’m not really sure how to deal with that cleanly?
You are being too simplistic.
There is no CGT on cash.
I think you’ll find that most people’s attitudes are as follows:
1. I know best how to spend my own money.
2. I’m very happy for the government to give me money, because I know best how to spend it.
3. I’m not terribly interested in where the government gets its money from, so long as it’s not me.
4. Oh, and I want loads of free stuff from the government too, like roads, the NHS, stuff like that.
As a collectivist, the left forgets (or despise) the fact that people are aspirational. People have also become wise to fiscal drag. Plenty of people no-one would call “rich”, or even “affluent”, will end up in danger of paying IHT as a consequence of inflation-driven corruption of the currency.
Of course people are apsirational.
But what can you aspire to in a world withuyt government, infrastructure, order, and so many of our states services?
Please tell…
What would you cut, and how much would you save, and who would bear the cost? And, why in every case, please.
A real life example for Nigel Green.
In 1977 after one year graduate earnings at £4k/pa, I had capital of £1,000 and got a 90% mortage of around £10k (MIRAS on the interest).
Inflation (not my work, not my taxes) deflated my debt and inflated my home value.
Later in life my brother and I inherited from our parents an estate just BELOW the IHT threshold.
Due to inflation and IHT (NOT my hard work, NOT my already taxed income) I now have a home worth £250k plus other inherited UNtaxed assets and I can pass that IHT-free to my spouse (or vice versa).
It may be that our sole surviving child may pay a small amount of IHT follwing future rule changes once we are both dead. What is wrong with that? I have those assets because of a system designed to privilege capital and it is time that changed.
Mr Green is effectively lying to make the large majority UNaffected by IHT fearful that it will affect their estates, so that the minority who ARE affected can maintain their lightly taxed capital wealth at the expense of those reliant on regressivey taxed income.
Thank you
Another personal example of a different way of thinking on inheritance, which is far more common than our politicians seem to think it is.
My wife and her 4 sisters all agreed with their parents before their death, that the family home should pass to only one of the sisters and her husband, because of their personal circumstances (they were returning from NGO work abroad due to terminal illness and had no home). The other 4 sisters had no need of that inheritance. The estate was of course well below the IHT threshold. Had it been above it, we could probably have clubbed together to pay the tax without disposing of the house.
This caused nil friction, it actually made us all happier. It also means we can still head north every year to visit the house my wife was born in and have fun re-unions with the now widowed sister. We are of course privileged to all own our homes anyway, and we are aware of that.
I despair of the LINO “government” who not understand things like this and seem determined to continue with their relentless policy of making the world a worse place for everyone.
The current situation is “MOST ESTATES (4% in 2020/21 – that’s only 1 in 25 estates) DON’T PAY IHT”
“Worship Mammon, Be Miserable”
“Love Mammon, Be EVIL”
(Alternative lifestyles and belief systems are available)
So should the wealthiest 4% pay more?
Could another small % afford to pay more?
Are the vast majority of 96%, UNAFFECTED?
YES!
YES!
YES!
Much to agree with.
I have taken part on such wider family discussions on fair shares.
Aspirational? OMG! What a term! What a term of abuse? Aspirational – spelt I-N-D-I-V-I-D-U-A-L-I-S-M, sub-spelling ‘S-U-C-K-E-R’.
For God’s sake – aspirational for what?
Yesterday on the train I sat there and watched two older people talking about the joys of Ryan Air whilst Europe and elsewhere is burning because of high temperatures. The fact that these people were being subsidised by global warming, poisonous air, and tax breaks on aviation fuel (even though there is not enough tax to pay for stuff apparently) had nothing to do with ‘aspiration’. It was ignorance born of self interest.
Aspiration will actually lead ‘expiration’ – the end – death.
What people are aspiring to is other people’s dreams – dreams of owning and dominating airlines, car factories, carbon, palm oil, having politicians in your back pocket and any number of things doing harm or where the real cost has been hidden by the market and consumer.
‘Aspiration’ I thought – my arse…………….
In fact lets re do the word: how about ‘ass-pirational’ – because most of the people (leaders and followers) probably have their heads up their arses anyway.
Suck it up people.
I always find those talking of their ‘next trip’ to somewhere for ‘next to nothing’ return deeply annoying for that reason. Have many people learned nothing?
In this post I agree with you 100% 🙂
Also your comments.
For some reason though, there does seem to be an aspect of irrational resentment of IHT. Probably amplified by propaganda from the wealthy (like Nigel Green).
I wonder whether it wouldn’t be simpler to tax the recipients of an inheritance as if it were income?
Of course inheritance tends to come as a large one off receipt. So I would suggest letting people average their income over the past, say, five years. That way, if they were of low income, they would only pay base rate, not higher rate, tax.OK, this is a tad more complicated than current income tax arrangements, but only a tad. After all IHT is only paid by 5%. And, at present, HMRC have to operate the seven year rule. So HMRC have the capability of doing it. I might add that I would let anyone average their income over five years, not just those receiving inheritance. That would avoid penalising those who normally have a low income but have the odd good year.
An advantage of this would be to encourage a wider distribution of inheritance, to avoid higher rate tax.
It would be a change. But you can’t make an omelet without breaking an egg. And it might avoid the current propaganda demonizing IHT. But, mostly, it seems fairer to me.
It is an idea
It is not one I think to embrace – because I think there has to be a tax free allowance
But thereafter the idea is one that should be on the table at any discussion on IHT reform
The simple way I see it – I either pay tax when I die, or pay more while I’m alive, so I enjoy less of my earnings. Can’t have it both ways.
Slightly satirical… I’m sure I’m preaching mostly to the converted.
I can recommend a brilliant way of avoiding (or rather, diverting) tax if you disagree with the Treasury’s priorities…
It’s called Gift Aid.
Capital taxes can also be avoided by paying for lots of other people’s stuff while you are alive and trying to die with less capital..
I am also building an overseas property portfolio, consisting so far of two toilets, one in Sind, Pakistan, and one in Syria. I’m also investing in overseas agriculture, olive trees for Palestine, and education and healthcare too, mostly in the Middle East. As a Brit I feel I have a lot to repay to ME (and many other nations we did damage to).
Given the atrocious spending priorities of LINO, I prefer to have a much bigger say in the redistributive possibilites of my tax, by cutting out the neoliberal government middleman, and giving away a fair chunk before it ever reaches Whitehall.
If you pay higher rate tax then there is an additional option as the higher rate Gift Aid tax relief (this is weirdly regressive) comes back to you and you can get rid of that to a non-charity, like your favourite political blog. I don’t have that option but I imagine it is very satisfying too.
It makes filling out my SA form for HMRC much less of a chore. (Reminder to self – fill out those SA forms BEFORE Christmas).
😉
🙂
I am amused.
My take on IHT has always been:
When would you like to be taxed on your wealth?
(a) during your lifetime?
(b) after you’re dead?
Why would anyone prefer (a)?
Is 5% doesn’t mean it going to remain 5%. The current average house price is £268k. The average pension pot is £170k giving an average total of £438k or £608k if one of 2 parents has passed away. For the one remaining parent passing this on to children will now mean £113 – £283k will be taxed at 40% with any future funds taken by the children being taxed at their nominal rates. These are UK averages. So yes it may have been only 5% impacted but that percentage is going to be significantly higher going forward. Hence why the average person is not happy.
I think you are completely ignoring exemptions. Nothing you describe is near taxable at present.
Interesting article!! My comment, which was requested by another publication, was that Inheritance Tax is the most resented tax by HNW Individuals. We are taxed when we earn money, taxed when we spend it, taxed when we invest it, and tax when we die! Which tax do you dislike the most? Do Governments use your tax well? As Richard says, I’m not a fan of too much tax, especially when its wasted .
And I doubt this comment is by Nigel Green.
But, please define waste – and tell us precisely how much is wasted and on what.
As most of us here, most of the UK and the overwhelming majority of the global population are NOT HNW people, we are more interested in tax justice, than the desires of HNW individuals to preserve their inherited privilege.
Agreed.
And thanks.
I run an International wealth management company with offices in 30 countries. We don’t advise in the UK on inheritance tax
But you do comment on it. Your clients will have noticed.