The All-Party Parliamentary Group on Inheritance and Intergenerational Fairness published a report on inheritance tax reform this week.
The report gives rise to lots of questions. The first is, who is in the APPG? It had only four members and one, at least, has lost his seat. So who is behind this?
Anithre is, whi funded the report? It seems likely it was the Society for Trust and Estate Practitioners (STEP), who sound like an innocuous bunch until you realise that for a long time their biggest branch was reported to be in Jersey and they did, undoubtedly, help spread offshore 'innovation' from tax haven to tax haven.
And then there's the report itself. It says:
Having considered a number of options, many of which merit further exploration, the APPG suggests replacing the current inheritance tax regime (which combines a high flat-rate of 40% with an array of associated reliefs), with a flat-rate gift tax payable both on lifetime and death transfers. The APPG suggests a rate of 10% but accepts that policymakers should determine the appropriate rate as they have better access to the data necessary to determine the rate at which taxpayer behaviour changes. The key principle is that it should be low enough for the tax to be broadly based without the need for complex reliefs. A flat-rate gift tax with fewer reliefs would be simpler, more broadly based, lead to less avoidance and ensure the UK's competitiveness in attracting wealthy people to live (and die) in the UK. Aligned to this change, all reliefs other than spouse and charity exemptions would be abolished and the tax-free capital gains tax (CGT) uplift on death would be abolished. There would be a death allowance at a similar level to the current nil rate band to ensure that small estates not currently paying tax will remain unaffected by the changes. There would also be an annual lifetime allowance of £30,000 on lifetime gifts.
Why propose such a low rate? The report says:
The tax rate would be set at considerably lower than the current 40% IHT headline level, which would encourage less avoidance. Small estates would therefore not pay the gift tax, and larger estates could not avoid it as donors can do at present by making gifts and surviving seven years.11 The main home would continue to be included in the tax base, as would all businesses and farms.
In essence the report is saying that tax avoidance should be priced out of the market. This makes it the most bizarre variant on Laffer logic: effectively it is saying cut tax until no one wants to avoid it because almost no one is paying it. This does not surprise me coming from STEP: this is their reason for being. But it is not a sound policy for government.
Nor do the proposals make sense. Permitting annual gifts of £30,000 is a literal gift t the well off - because only tiny numbers can afford to do that.
And whilst removing reliefs on business and agricultural property would be exactly the right thing to do, cutting the rate at the same time makes no sense: the reason for cutting these allowances is that they reinforce wealth inequality and so does the proposed change.
Whilst the suggestion that small estates will not pay is exactly true now, when well over 90% of all estates have no charge on them.
So this report asks the wrong question to get to the wrong solution. It asks how can inheritance tax be tinkered with to preserve wealth inequality? And the answer is it cannot be. Inheritance tax is a flawed tax that is largely beyond redemption.
The answer is fourfold.
First, abolish inheritance tax.
Second, have an annual wealth tax on estates over, say, £2 million.
Third, have a tax on gifts charged on the recipient, ideally as income.
And fourth, charge capital gains on death, including on the family home, having allowed for surviving spouse, civil partner and maybe limited carer exemptions.
Those are the reforms we really need. But a move that reduces taxes on wealth is the last thing we need. And that is what this report promotes. It's bad news.
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The APPG has only four *officers*. You have linked to the group’s information on the parliament.uk website as at 27 March 2019, which is of course out of date. There is a more recent version as at 5 November 2019 at https://publications.parliament.uk/pa/cm/cmallparty/191105/inheritance-and-intergenerational-fairness.htm but that is also out of date (Keith Barron and David Simpson both lost their seats in the December general election). There appears to be an even more recent version from January 2020 on the group’s page on the STEP website – https://www.step.org/appg which will no doubt appear on the Parliament website shortly, when the next update the register. That lists four officers, all sitting MPs, John Stevenson and George Howarth (as before) plus Holly Lynch and Matthew Offord.
I haven’t located a list of members – perhaps someone else can – but as they are informal groupings, I suspect MPs can come and go from membership at will.
As for the IHT reform proposals, the appendix suggests it was largely written by Emma Chamberlain. You don’t like the proposal, but there is some good, considered stuff in the appendices, including pages 24-26 considering CGT on death, saying the OTS reckons it would raise less than IHT.
The idea proposed in the report – reforming the tax to give it a wider base at a lower rate – is certainly one option.
Charging capital gains tax (what rate? 20%? marginal income tax rates?) on the death estate is another option. Depending on what allowances and reliefs you have, you might find smaller estates end up paying more (if you are charging CGT on gains within the current nil rate band), and you might end up with some larger estates paying less (an individual holding £1m in cash, say, where there would be no disposal and no gain). If you were to draw up a table like that on page 14 of the report, what would it look like?
I doubt either reform is going to be particularly popular with electors. Particularly if the change can be characterised as “everyone pays more”.
Why not charge CGT at income tax rates?
And receipt of gifts at the same rate?
No one need pay, of course: they could just forego the gift or donate the gain to charity
If you abolish IHT and impose CGT on death, you would need to increase the rates of CGT to avoid in effect halving the rate for most assets (40% to 20% as things stand, but only down to 28% for residential property, if PPR does not apply). And at the same time reducing the base (CGT is charged on gains, not gross values). And not all assets are subject to CGT. How much tax would the estate pay if the deceased held heaps of cash until death? No gifts, and no gains.
Or are you suggesting two taxes on death; CGT at income tax rates (up to 45%) for the deceased, and a gift tax at income tax rates (up to 45%) for their legatees? So £100 in the estate could turn into £90 of tax and £10 for the beneficiary. If you want to charge both sides, perhaps it may be more feasible to charge each at say 10% or 20% .
As I said, the report considers CGT on death, page 24-26, and also various other options, such as a wealth tax or a gift tax. You appear to want all three. Perhaps three small taxes are better than one big one?
I would align cgt and income tax rates…
I have long suggested cgt on final house disposal – including before death i.e. effectively a rollover relief until then
So yes, CGT and then a gift relief tax
I accept your point about double tax relief
I will consider that, but only to the extent tax is actually paid
And multiple taxes are always a good idea
I think it best that you engage with STEP and think about how you might feel in 10 or 20 years time. IHT does cause much upset for the moderately wealthy elderly and that is often a quite unsettling way to go through retirement. Those with much more bunce either die in ignorance or have some clever plans in place.
But if you can do anything about the Duke of Westminster and all those clever trust arrangements, so much the better.
It might be a bit much to engage with STEP
And candidly, if IHT is due on my estate, so be it
But getting rid of its anomalies is a goal, as is something much better
What about introducing wealth taxes, keeping inheritance tax rates as they are and remove all allowances??..tax the “haves” into oblivion.
I see no logic to that
Tax has to be just
Equally, it has to be equitable
We do not have that now
But that provides no reason for creating alternative injustices
Any inequality is an injustice. Eradicating excess wealth should be policy.
I’m sorry: some inequality is a fact of life and I am not in any way endorsing a call to remove it entirely
That is for fantasists, and not very helpful ones at that
Whilst I can understand the resentment of those who are wealthy which can give a rationale to the theory that it will ‘crowd out’ the capacity of those much poor to be able to better themselves.
Surely, the issue has to be how we reward effort and endeavour. A chocolatier, pays himself a dividend of over one half of a billion pounds in dividends and a betting site pays their chief executive one third of a billion pounds both in ONE YEAR.
These are hardly vital to our quality of life, whereas the efforts of those who make a genuine improvement, from the dustman who collects your refuse and therefore stops your house from becoming a dustbin to the cancer surgeon who prolongs your life, receive much less.
Stupid.
I do not dispute that such inequality needs to be tackled
But that is not the same as seeking to eliminate all inequality which would be deeply oppressive
We can never eliminate inequality but what we should endeavour to ensure that those who make a positive contribution to our quality of life are adequately rewarded financially to be able to sustain that quality of life for themselves. We do not disagree.
Agreed
I believe in equality, but I accept it is impossible in any real sense given individual differences. But it would be possible to make many things, such as pay, wealth accumulation, housing, education, access to a health service, the law and so on much more equitable. No one could complain of being oppressed if we made it impossible for individual wealth to be into the £billions, since, as Danny Dorling frequently points out, the rich are rich largely through luck and not because they are so superior to the rest of us. The rich are also rich because the poor are poor and it largely a matter of luck for the poor as well.
The project has to be that we tackle obscene wealth as well as the moderately wealthy. I suggest we tackle it largely at source, by capping income and gains, rather than taxing it away once it’s been accumulated – and probably hidden beyond reach. How else are we going to reduce wealth in the tens of billions? Knocking off a couple of billion won’t even be noticed.
(Incidentally, the chocolatier’s UK company made such large losses over the years on sales of hundreds of millions that they paid hardly any tax – how public spirited of him to keep the old dog alive)
Pay caps is a great idea. It was suggested by Jeremy Corbyn but never become party policy for some strange reason. The idea should be reignited don’t you think?..from bankers to footballers to surgeons in private healthcare .. having a restriction on the multiple they can earn in relation to the average wage would work – I suggest a maximum of 10. That provides more than enough to live on happily and will prevent the build up of wealth and prevent excessive and unnecessary consumption. That is turn ties in with how we need to live our lives if the planet is to survive.
But how do you prevent reward being paid in other ways e.g. dividends?
“But how do you prevent reward being paid in other ways e.g. dividends?“
If there is buy in on pay caps then legislation can, I’m sure, prevent pay being redirected into dividend remuneration. For the rentiers our there just impose a punitive tax for unearned income and interest.
If you want to dissolve inequality you need to think accordingly.
“having a restriction on the multiple they can earn in relation to the average wage would work — I suggest a maximum of 10”
With all due respect, Nick, no it wouldn’t work at all.
NMW is £8.21. Assuming that someone in a large organisation is on that, it would mean that the maximum anyone could earn is £82.10 an hour. About £160k a year. Try getting any premier league footballers to accept that. Or anyone in business who could earn 10 times that abroad.
The point is, if I were running my own big business, what business is it of you or anyone else to tell me how much I should pay my staff?
And what of the self-employed? An author writes a best seller. A musician a great tune. You’re going to limit what they can earn from it? How?
You’d see a brain drain out of the UK which would enrich other countries and make us poorer.
I would not support a 10x cap
But I could live with 20
And we are talking employees here…they are not hard to spot
As t your question ‘what business is it of yours’ …oh dear, you really don’t get the concept of the rule of law, do you? Compliance is required
Why assume the NMW? The height of a ceiling implies a floor. We have to consider where the floor is.
The Ecology BS manages on a ratio of just over 5:1and is capped at 8:1 and the highest paid earns around £100k. If we set the floor for fte. at the present median wage the 10 times cap would be £300k.
I used that ratio of 10x median wage for the TUC once
“oh dear, you really don’t get the concept of the rule of law, do you?”
Of course I get the concept of the rule of law. Quite why you feel the need to patronise people I can’t imagine.
But just because a government CAN legislate, doesn’t mean that it should or that it is right that it does. You think that the fact that a government passes a law makes that law justified in and of itself? That the government has the right to interfere in everything? Where does that end? I asked what right someone has to tell an employer what they can pay an employee and your answer is, we can pass a law to make it the government’s right? Go down that road and such self-justification leads quickly to tyranny.
And the consequences of a salary cap would be detrimental to the country. What would happen to an employee who demonstrably earned his or her employer more than the cap? “sorry, can’t pay you any more, the company gets to keep some of what ought to be your reward”. Wow, helping the bosses there!
And as I say, an employee who could earn 10 times as much in a more enlightened country would be off. Unless you plan ‘compliance’ to stop that as well?
You are, I presume, aware of the national minimum wage?
Paul Raine says:
“You think that the fact that a government passes a law makes that law justified in and of itself? That the government has the right to interfere in everything? Where does that end?”
I don’t know where it ends, but it starts with stealing property by conquest and declaring it to be privately owned.
You don’t hear the wealthy complaining about government interference when it protects their ownership rights on what they, or their forebears, pillaged and looted.
Richard
Surely you can tell the difference between the NMW which is designed to protect the low paid and a salary cap which is designed to punish the brilliant and best?
And what would the result be? Someone on a £1m salary pays over £450k in tax and NI. Limit that to, say, £300k and the tax/NI reduces to around £125k and the rest is kept by the employing company and is taxed at lower CT rates. The exchequer loses. And you haven’t even tried to answer why an employer should benefit by restricting the reward earned by an employee. Nor have you answered what would happen to the UK economy as all its brightest and best left to work elsewhere. Perhaps you should go to a pub in Manchester or Liverpool and explain to supporters of their great football teams how it would be better if they relied on journeymen players from the lower leagues whilst their best players played abroad? That would be a funny conversation.
“You don’t hear the wealthy complaining about government interference when it protects their ownership rights on what they, or their forebears, pillaged and looted.”
A salary cap would enable wealthy employers to continue to ‘pillage’ wealth being earned by their employees. I’m not sure why you would support that. A brilliant engineer or scientist develops something that earns his employer a couple of million. You’re saying the employer should only have to pay the salary cap, not a higher percentage of what the employee has earned his employer. Seems odd. The employee would go to another country. The UK loses.
But as always, high ideas are best tested in reality. Are there any countries with a legally enforced salary cap?
No, and I am not actually suggesting one
I have suggested that salaries above ten times median wage not be tax-deductible
What I objected to was your arch libertarian view