The usual socialist claptrap one expects from this site. Inheritance tax is a brutal, immoral tax on the rank and file of the country, not on the “rich”. As one who has just witnessed a Mother reduced to reliance on other family members instead of independance in her old age, as well as a Father who had to endure the knowledge that all the hard work he had done to guarantee their old age would be destroyed on his death, I can witness this. It really is the most pernicious ridiculous nonsense to argue in favour of inheritance tax, especially at the level it is set at present. It is, of course, totally indicative of the destructive, pernicious nature of left-wing thought. It is the kind of thing that puts off many people who might be attracted to left of centre politics; and that of course is the point: the left wants to impose a pre-determined social and thought system on the populace rather than listen to the actual desires and aspirations of the electorate.

KB – your mother and father weren’t married then? If they were, your father’s estate would have passed to your mother without inheritance tax on his death.

“It is the kind of thing that puts off many people who might be attracted to left of centre politics; ”

Hmm, if the idea of progressive redistributive taxation “puts people off” left-wing politics, then I’m fairly sure they were never really going to be left-wing sorts of people.

Of course, there is the New Labour model of saying “Hey, let’s abandon core left-wing principles, adopt a Tory-lite approach and call ourselves ‘left-of-centre’”. But the legacy of New Labour is arguably that there’s nothing in a name when you’ve hollowed-out the substance.

Oh, and on the notion that “ordinary” people are ruined by inheritence tax, this is clap-trap.

Inheritence tax as it stands kicks in above a threshold and only applies to 30-40% of an estate. This means most people pay no inheritence tax, and those who do pay it only on a proportion of their wealth above a certain threshold. Inheritence tax simply cannot “ruin” people anymore than income tax can. It’s simply dishonest to use apocryphal anecdotes to scare people into thinking inheritance tax puts people on the streets, as a way of entrenching the privileges of the rich.

As a high(ish) earner from a modest background, ditching inheritance tax while raising income tax doesn’t do much for me.

Of course the Tory pledge to do it “in the first term” gives them 4-5 years anyway…

Paul can you clarify something for me – if you buy an insurance policy to pay your inheritance tax, then the inheritance tax still gets paid, just via the insurance provider. You describe this a tax avoidance – that looks wrong to me.

Why should anybody on the left care if rich parents arrange to pay their off-spring’s inheritance tax via insurance? The privileged offspring might seem better off, but of course having paid all those expensive insurance premiums means that their parents have less money to leave them in the first place.

Presumably there is a net reduction in tax, otherwise people wouldn’t bother with it – my guess is that paying your inheritance tax in advance via insurance means that the eventual taxable estate is smaller. It’s a little bit like putting savings aside to cover inheritance tax, without those savings themselves being taxable.

So what’s the net cost in terms of tax revenue? Presumably there’s some sort of trade-off such that the existence of these insurance schemes reduces other forms of tax avoidance effort, but if even after taking that into account there is still a net loss of tax revenue, wouldn’t it be relatively trivial to add a surcharge to such insurance schemes to close the gap?

The usual socialist claptrap one expects from this site.

That would be Adam Smith the socialist then.. given how much he was into progressive taxation.

Or, alternatively, this is the only way rightwingers can defend their lame position.

I agree with Paul Sagar on the morality or otherwise of a tax which, it must be remembered, only ever affected a few people & not those who are having the hardest struggle to improve their lot: low-paid workes who are flayed alive by income tax, VAT & similar shite.

But even right-whingers whose values are different to mine can come to at least a short-term agreement on politics. We are in a recession & house prices are tumbling, so this policy should at least be suspended until they reach 2007 levels, whenever that happens. Does Osborne seriously not realise that his flagship policy is out of date & the assumptions on which it was based have been discredited?

We are no longer taking out loans we cannot repay for fucking toss with which to impress other knobheads, we are struggling to pay our bills & clinging on to jobs or finding ourselves out of work for fuck knows how long.

Camoron has failed totally to understand that times have changed. Even New Labour are quietly ditching their welfare “reforms”, why is he not man enough to do likewise?

Luis -

The net cost to the taxpayer isn’t the issue.

IHT is about far more than raising revenue, it’s about levelling playing fields.

“Or, alternatively, this is the only way rightwingers can defend their lame position.”

What exactly is “lame” about believing that parents should be permitted to pass on all their wealth to their children? It’s essentially a gift and it strikes me that there’s something wrong about taxing a gift.

Unless I’m mistaken Australia doesn’t have IHT. Are they therefore “lame”?

Duncan

No, it is the issue. If there is no net cost to the taxpayer, then the sum of money taxed – the reduction in wealth passed on from parent to child – is the same. The playing field is just as levelled.

Look at the maths with no net loss to taxpayer (the numbers are illustrative only). No insurance: family wealth £100m, tax 40%, inheritance £60m – playing field levelled to some extent. With insurance: family wealth £100m, £40m paid in insurance premiums and £40m paid to state by insurance provider, 0% tax paid on estate, inheritance £60m. Playing field levelled to same extent.

Of course the sums paid in premiums – an hence reduction in inheritable estate – must actually be greater then the payout by the insurance provider, otherwise the insurance provider wouldn’t make a profit.

How I suspect it works is something like this: £100m wealth – £29m paid in insurance, taxable estate now £71m, taxed @40%=£29m, now covered by insurance. Inheritance £71m, net loss to taxpayer £11m. Playing field not so levelled – it is about net loss to taxpayer.

Richard, I believe that the argument is if revenue has to be raised, it should be raised in this way rather than from taxing work or consumption.

Osborne’s position is inappropriate for the needs of our times.

I don’t see why being taxed on a gift is inherently worse than being taxed on income gained through employment. The principle behind a progressive tax system is that people contribute according to their means, and those means can be obtained in different ways – through income, through inheritance, through investments etc. Therefore it is only fair that all of these are taken into account for the purposes of taxation. Say someone is fortunate enough to inherit enough money to never have to work again – they would be entitled to all of the things that taxation pays but only pay a fraction of the tax that people forced to work for a living have to pay. That can’t be fair surely.

Guh. This comes around every few months, and the arguments are always the same – and they always miss the point. Barely anybody pays IHT, not because it affects only the very very rich – it’s estimated that about 30% of estates are potentially liable to IHT at any one time – but because it’s so easy to avoid paying it. Paul talks about insurance, but there are loads of easier, and cheaper, ways to do it, whether by putting assets in a trust, or by transferring sums taxfree in anticipation of death or whatever. Anyone who can afford an accountant for an hour does not need to be paying IHT.

So, regardless of the moral issue here (and given that, see above, those few people who end up paying IHT are more likely to be people who die unexpectedly than the ‘very rich’ most of the ‘levelling the playing field’ stuff is overblown) IHT is a spectacularly inefficient tax. Ideally taxation that is designed for revenue purposes should have as little impact on behaviour as possible. Taxation that is designed to alter behaviour should alter it in a way beneficial to society (like cigarette duties). IHT, by being an anticipatory tax on savings, encourages behaviour that is far from beneficial, without much in the way of an associated social benefit.

In other words, it’s a rubbish tax, and there are better ways to raise the piffling 3bn that it raises – that’s less than the amount raised by beer duties.

I think all forms of wealth should be taxed, and that inheritances are particularly pernicious because they do such a good job of reinforcing the class system. (My family are not rich and certainly won’t paheritance tax, but I have told them I don’t want to inherit anything other than sentimental stuff with no hard value, and they should give anything they have left to charity instead.)

However, with our small-c conservative electorate in Britain, there does seem to be a general feeling against IHT – certainly people want to be able to pass something on to their children , so I think there’s political utility in keeping IHT pegged to be payable only by the richest 5% of estates, to make it clear that only the super-rich pay it.

I think there’s political utility in keeping IHT pegged to be payable only by the richest 5% of estates, to make it clear that only the super-rich pay it.

Aargh… The super-rich don’t bloody pay IHT! Look, if IHT was such a fan-bloody-tastic way of preventing the entrenchment of the aristocracy and creating a level playing field – then why the hell hasn’t it bloody anything towards that goal? Why won’t the Exchequer pick up 40% of the Duke of Westminster’s estate when he dies? Because it isn’t the ruchest 5% of estates that are liable for IHT – it’s the most disorganised/unlucky estates that do.

Look, in the early days of death duties (as they were called) this more or less did happen. The First World War was particularly ruinous for the old aristocratic families, which could see three or more changes in head of family in a matter of months. The result was the large-scale selling off of country estates and a substantial decline in the power of the aristocracy. But there are now so many loopholes (and very hard to close loopholes at that) that it is effectively an optional tax.

But people can still pass on a substantial amount (up to £312k) without any IHT being taken at all. I don’t see why only the super-rich should pay it – yes, it was originally intended to be paid by the wealthy but the fact that a higher proportion of people are paying it means that more people are receiving relatively large inheritances. Yet they think they are being hard done by.

I’m not saying IHT works perfectly at the moment, I’m saying I think it SHOULD be pegged to the richest 5% estates, and loopholes removed.

Equally the Tories’ proposals would only benefit millionaires, so they would make inheritance tax less fair, not more fair.

The super rich seem to find ways of avoiding lots of taxes and its a problem that has to be addressed given the state of our national finances. Trying to close as many of those loopholes as possible should be the first priority (for all kinds of taxation), as well as attacking tax havens.

If the purpose of inheritance tax is to do more than to reaise revenue, but is to ‘level the playing field’ then surely, the honest solution is to confiscate all property remaining as an asset of the deceased on death? If that was the case, what provisions would you draw up to deal with inheritance received in advance of death? Would you confiscate that too? Seems to me you really want to revisit the arguments about Capital Transfer Tax … an argument that was lost when I was a child as it was a tax on aspiration and was a bar to both innovation and economic development.

The reality is that IHT is a tax that tends to be paid by those who are not super rich but who happen to have assets (often the family home) that exceed the threshhold. It is taxed at 40% after the threshhold has been paid and, as a result of the panicked changes brought in by Gordon Brown after the Tory IHT proposals, the threshhold is effectively doubled for the survivor of a couple who live in a relationship that is approved by the state (married or civil partners).

The result of the Labour IHT proposals is that the Tory proposals (marginally more generous) would cost far less than the original estimates – and with the credit crunch, the cost is lower still.

The super rich (those with estates of more than say, £10 million) will often utilise the facilities of my colleagues at the Bar, other lawyers and specialist accountants to ensure that many of their assets are beyond the reach of the British tax man. Very few will pay significant sums in tax by way of IHT as a result.

As a result and in practice, IHT is a tax on aspiration, rather than wealth.

‘Levelling the playing field’ will not be achieved by confiscatory tax regimes. Those with skill and ability will leave – and will be welcomed elsewhere with open arms (and more beneficial tax regimes). The factor that is continually ignored by those who advocate an extreme form of a ‘progressive’ tax regime is that there are diminishing returns – look at the effect on tax receipts of the early 80′s tax changes.

Adam Smith did consider that a progressive tax regime should exist – but he lived at a time when income started to be taxed – 2d in the pound for incomes over £60 (a marginal rate of slightly less than 1%) and 2s in the pound for incomes over £200 (a marginal rate of 2%). Estates were not taxed until legacy, succession and estates duties started to be levied at the end of the 18th Century.

Progressive taxation to eliminate the need for income tax on small incomes, and to increase taxation on larger incomes is probably accepted by most politicians in the UK. Whether tax on incomes, assets and capital should be used for any purpose other than to raise revenue for the public services is where the debate exists. In my view, and it will not come as any suprise, taxes on incomes, assets and capital should be used to raise revenue and not for any other purpose.

Luis Enrique,

You make good points. The point I was trying to make simply that to the very rich people who are liable to pay estate tax, it’s actually comparatively cheap to find ways to pay to avoid the estate tax, given how much these people are liable to pay upon death.

@ everyone making the point that IHT at the moment is very poorly administered, hits the unprepared/disorganised and doesn’t actually level the playing field.

You are right.

But the point you make is just that the current system is inadequately administered and enforced – not that IHT itself is to be rejected, which seems to be what some are inferring/implying. Pointing out that IHT currently raises little money and doesn’t break down class barriers is just supporting evidence for taking measures to *improve* the IHT system, better regulate it, close loopholes and *make it* a viable system which raises money and levels playing fields.

Evan Price,

I don’t think many people would advocate a system of complete reposession at death. Most parents do want to leave their children something – be it money or property – to help them out, or just from sentimentality.

The state need have no wholesale objection to that at every level.

Indeed it doesn’t – we only tax inheritance over certain thresholds.

The point is, there comes a stage when leaving gifts or inheritence to family members has consequences other than being nice to children. It has consequences such as entrenching class inequality, concentrating wealth in the hands of some for no better reason than they were born to parents X instead of parents Y. Not only is this unfair, but there is good evidence to show that inequality is bad for *everyone* in society in ways you wouldn’t expect (e.g. people tend to die sooner and get ill). This sounds very fantastical and i’ll confess I don’t understand *why* – but the work of Paul Kruger (nobel prize winning economist) is very interesting on this point.

So the state – in my opinion – has a role to balance out the negative effects of allowing people to leave property and wealth to their children. On the one hand, a free society must respect the fact that people do want to leave something for their children. On the other, a fair society must realise that leaving wealth to children has wider social and economic impacts which must be corrected for.

As a leftwing social democrat, I believe the state has a responsibility to do just that. And that means a proper system of progressive inheritance tax.

When people call for the closure of loopholes, the problem is that they don’t identify which loopholes to close.

Most ‘loopholes’ involve reliefs that exist – charitably donations, the exploitation of the threshold to ensure that it is entirely used, the use of Agricultural or Business property relief. These ‘loopholes’ are used to ensure that a business or farm doesn’t have to be sold merely to pay the tax and or because successive Governments have decided that the potential for future revenue is worth the relief. Alternatively, in the case of charities, Governments have decided that the relief is a ‘good thing’ – although whether this consensus will survive the shenanigans of the current Charty Commission is unclear.

Other ‘loopholes’ involve the use of instruments that effectively mean that the asset in question is not the ‘property’ of the deceased at all – as in the case of discretonary trusts. The UK Government has probably done all it can to ‘close’ down this ‘loophole’ by treated certain trust assets as the property of the deceased for the purposes of IHT.

So, for those who talk about closing ‘loopholes’, which ‘loopholes’ are you talking about, and what do you propose to do?

Evan’s right – arguing for the closing of loopholes is cheap and easy. IHT is such an inherently flawed tax that it would be better to look for a better way of raising revenue or pursuing ‘social justice’.

As for the ‘unfairness’ of leaving money to your children, what has far more of an impact on social mobility and class preservation are things like reading to your kids, having books in the house and sending your children to a good school (whether private, state selective or simply in an expensive catchment area). These are all unfair as well. Ban them? Tax them?

‘Levelling the playing field’ will not be achieved by confiscatory tax regimes. Those with skill and ability will leave – and will be welcomed elsewhere with open arms (and more beneficial tax regimes).

Well I guess that depends on what the level of tax has to rise to in order to be classed as “confiscatory”. I hardly think our current level of IHT (or income tax for that matter) falls into that category, although there may be “super rich” people who would leave anyway if they were forced to pay it. I’ve never really understood this – ISTM that one of the benefits of being super-rich is being able to decide where in the world is the nicest place to live and going to live there. Instead people go to live in Switzerland in order to save on taxes they could easily afford to pay.

No offence meant to any Swiss people reading.

“So, for those who talk about closing ‘loopholes’, which ‘loopholes’ are you talking about, and what do you propose to do?”

Not sure. I’m not a tax expert. I do however have this old-fashioned belief that the Government should employ tax experts to answer those questions on behalf of the electorate and citizenry.

Paul – so it’s just a ringing declaration of ‘something must be done!’ and no more then? If you don’t know how you want IHT to be reformed, then all this piece is saying is that IHT might be a good thing, if it worked, which it doesn’t.

And I’m not sure that gets us anywhere really.

“The point is, there comes a stage when leaving gifts or inheritence to family members has consequences other than being nice to children.” and
“So the state – in my opinion – has a role to balance out the negative effects of allowing people to leave property and wealth to their children. On the one hand, a free society must respect the fact that people do want to leave something for their children. On the other, a fair society must realise that leaving wealth to children has wider social and economic impacts which must be corrected for.”

Currently, IHT is raised on estates worth more than £312,000 – the problem is that many family homes in London are worth more than this. Where would you decide to fix the rate at which you would want to eliminate the ‘wider social and economic impacts’?

The problem of inequality will not, in my view, be resolved by eliminating the financial advantage that goes with a financial inheritance – there are many other inheritances that are probably as must to blame (if not more so) for inequalities in our communities and country and most are impossible for the Government to ‘resolve’ even if it wanted to.

“Well I guess that depends on what the level of tax has to rise to in order to be classed as “confiscatory”. I hardly think our current level of IHT (or income tax for that matter) falls into that category”

That is precisely the point that I make – if it is genuinely ‘confiscatory’ as it was when I was a child (86% top rate with a 13% surcharge), then the revenue generated diminishes. The problem with setting taxation is that there are diminishing returns at both ends of the spectrum – and an optimum level at which the most revenue is raised. In the 90′s it was said that 40% was the optimum level for higher incomes – as a result of changes around the world, I would not be surprised if we were to discover that it may be too high today. As to IHT, 40% on estates is probably sub-optimal as the incentive to the very rich to remove their assets from this tax is so large that there is a whole industry built on the avoidance of it …

Sorry, I should have declared an interest. I have acted on occasion before the General and Special Commissioner for clients. Does that make me a ‘tax expert’ – in comparison to some, maybe, but on the whole I just consider myself to be a ‘student’ (which is probably the worst of all worlds – a person who knows a little)!

tim f I think all forms of wealth should be taxed, and that inheritances are particularly pernicious because they do such a good job of reinforcing the class system.

All taxation is theft by the state from the individual or Company. We can argue about the relative perniciousness of each form of taxation but surely the theft from an individual on his death of much of what he has earned throughout his life is the worst tax of all.

For Tim to attempt to justify it because it panders to his class envy is crass and to excuse it because the state cannot get its act together to levy it properly is equally disingenuous.

There is a natural suspicion that perhaps the reason why Tim believes “all wealth should be taxed” is not only because hasn’t inherited any but because he hasn’t created any either.

“Levelling the playing field” – what bollocks.

The “rich” parents are dying at 75+, so the kids are inheriting in their 40′s or 50′s.

Whatever may or may not be “reinforcing the class system” it is not the transfer of wealth on the parents’ death.

Such reinforcement is taking place years earlier as the state education system continues to fail the poor.

“Wealth Preservation Trusts” are really about Canada and US tax law, inheritance tax avoidance needs something rather more clever in the UK because of the reservation of benefit rules in IHTA.

Personally I tend to think that we should abolish inheritance tax entirely and instead treat benefits currently chargeable to IHT as a capital gain taxed at the recipient’s marginal income tax rate at the point when the beneficiary actually receives the benefit.

“great civilized countries have an income tax and an inheritance tax”

That´s good to know. Given that Sweden doesn´t have an inheritance tax does that mean it´s not great or not civilised?

Spiggle, would you rebase the values and allow a postponement to pay the CGT or would you demand payment of the CGT on receipt? Alternatively, would you simply allow the transfer and only charge CGT on all gain since acquisition (by the deceased) when the asset is sold? What would you do with the family home? Would that be taxed on receipt? Would you allow a spousal exemption? What about survivorship in joint tenancies?

TimJ @13:

Barely anybody pays IHT, not because it affects only the very very rich – it’s estimated that about 30% of estates are potentially liable to IHT at any one time – but because it’s so easy to avoid paying it.

What changed is that recent inflation, combined with the truly disgusting amplification of a temporary boom in property costs driven by the Buy to Let mortgage bubble, resulted in a situation where people being assessed on their home (as an ‘asset’, even if it’s still mortgaged, aiui?) who in 1997 were worth 69k suddenly found their ‘assets’ were worth very slightly more than the threshold, even though they did not have, had never had and never would have the kind of cash flow or capital reserves necessary to absorb that kind of tax. Choice then is realise the asset or go to prison. Sometimes, it’s no choice; realising the asset still doesn’t provide enough cash.

The threshold was set based on a (now massively outdated) set of assumptions about what that asset level meant in terms of not just asset level but also income (required to maintain the assets), social status, job security, etc. Those assumptions have been radically re-engineered now, but the law has not been changed to reflect it.

Evan Price @27:- Currently, IHT is raised on estates worth more than £312,000 – the problem is that many family homes in London are worth more than this.

But as I say, only very recently.

Rather a lot of homes in London and the South East have been valued at over the IHT threshold throughout by period in practice as a lawyer.

BTW, the debts of an estate should be deducted before the value of the estate is calculated.

John – absolutely, but usually, by the actual time of death, the large family home has either been sold or transferred already. This is why lots more estates are potentially liable for IHT than end up paying it.

I’ve always thought that if the Tories actually wanted to take the heat out of the IHT debate they should simply exclude the primary dwelling – as is the case for CGT. Far fewer estates would then be caught, and it’s easily defensible on the lines you set out above.

Evan Price @35:

Oh, I agree that debts on an estate should be deducted before assessment. This is even more true in the case of a mortgaged home: what I was saying is that as I understand it, for the benefit of this tax, a mortgaged home is seen as an asset not as an encumbered asset, whereas (for example) business debts would be pre-deducted. I could well be understanding wrong?

TimJ @36:

Interesting idea. I do like the idea of an IHT exemption for the family home (not primary residence: the actual house your family lives in, I would argue) but really only if the buy-to-let crowd get bitten for every house they own and rent out. I suspect this would not happen, as the homes would be technically owned by a business and the inheritance would be of the business: which again, AIUI, IHT does not cover.

Those who have multiple homes and live in them are going to have most of them overseas. There is a lot more land overseas, so they’re doing my potential kids less damage. Those who profiteered from the Governmental speculations of the 90s by buying up three or four or twenty houses on cheap-ass buy-to-let mortgages, then leveraged that to end up sitting on a huge pile of cash and denying 20 other families the ability to own land should definitely be a target, at least for the next ten to fifteen years while we’re digging out of this particular recession.

Followup to Tim@36: I understood that the only reason for the change in common practice with regard to family homes was precisely to avoid paying death duties? That’s certainly the only reason ownership of my grandparents cottage was sold to my aunt: avoidance of tax. Mind you, their cottage was valued at well under the threshold for IHT, so I’m not sure what taxes we were avoiding; but that was the reason I was given when I enquired at the time. Is there any other reason to suggest why people 40 years ago, if they owned a house at all, would leave it directly to a child versus 20 years ago, by which time it was common practice to shift it at least 7 years before you felt you were likely to die?

John, have a look at seciton 5(3), IHTA 1984 – liabilities should, save as provided in the Act, be excluded. Lawful debts secured over any asset will be taken into account prior to assessing the value of the net estate for IHT purposes.

The reason that joint tenancies were severed so that the deceased could leave their divided half interest to their children was so that the asset (the family home in many cases) could be passed to the children using the exempt threshhold – leaving the surviving spouse and children as tenants in common (in equity only – as the legal estate could only be held on joint tenancy).
Then when the surviving spouse died, that person’s share would pass to the children as well – and so limiting the IHT payable on that person’s death to IHT on the half share, rather than on the whole.

The need for many people to use this level of planning has been, in part, removed by the doubling up provisions last year – effectively allowing a surviving spouse to use both spouses’ allowances – currently £624,000 (2 x £312,000).

BTW, no-one should or may use comments by me on this blog (or any blog) as legal advice of any sort.

Is there any other reason to suggest why people 40 years ago, if they owned a house at all, would leave it directly to a child versus 20 years ago, by which time it was common practice to shift it at least 7 years before you felt you were likely to die?

There’s also the issue of paying for care – if you think you are going to need residential or nursing care in old age, it makes sense to transfer ownership of your home far enough in advance that it isn’t treated as an asset.

It seems to me the government gives mixed messages – we’re encouraged to save for our old age, but on the other hand if we do save for our old age and need residential care the government says “thanks very much”, takes the money, and gives us much the same treatment as we would get if we hadn’t saved. My mother’s solicitor’s advice on avoiding inheritance tax or confiscation to pay for residential care is simple – “spend it before you die or get too old to spend it”.

What changed is that recent inflation, combined with the truly disgusting amplification of a temporary boom in property costs driven by the Buy to Let mortgage bubble, resulted in a situation where people being assessed on their home (as an ‘asset’, even if it’s still mortgaged, aiui?) who in 1997 were worth 69k suddenly found their ‘assets’ were worth very slightly more than the threshold, even though they did not have, had never had and never would have the kind of cash flow or capital reserves necessary to absorb that kind of tax. Choice then is realise the asset or go to prison. Sometimes, it’s no choice; realising the asset still doesn’t provide enough cash.

But IHT is only levied on the value of the estate above the threshold so if the asset is only worth slightly more than the threshold the tax will be minimal. Even if it is worth substantially more and so there is a hefty tax bill and there are no other more liquid assets or insurance policies to help pay the tax bill there would have to be an absolutely catastrophic collapse in the property’s value after it was assessed for IHT purposes for there to be a risk of not raising sufficient funds to pay the bill by realising the asset.

That´s good to know. Given that Sweden doesn´t have an inheritance tax does that mean it´s not great or not civilised?

Hey, I’m all for following Sweden’s welfare state ideas. Would you sign up to them too Tim?

I am quite happpy to get rid of Inheritence Tax, but lets then tax the people who bennefit from the inheritence.

I mean, it is nothing more than a capital gain, so charge capital gans tax on the people who get the cash.

Sally @ 44,

I am quite happpy to get rid of Inheritence Tax, but lets then tax the people who bennefit from the inheritence.

I mean, it is nothing more than a capital gain, so charge capital gans tax on the people who get the cash

If I understand you right, this is quite similar to an idea proposed by liberal political philosopher John Rawls. See this article by Martin O’Neill:
http://www.newstatesman.com/politics/2007/10/inheritance-tax-iht-death

To return from abstract arguments to concrete policies, what should Labour do about IHT, in reaction to the Tory proposals? The answer comes from an unexpected direction. The American philosopher John Rawls, in his final book Justice as Fairness, suggests that a just society should have a system of IHT that taxed beneficiaries rather than estates. In that way, inheritance could be taxed much more like income, and hence inheritance tax could be made progressive, through orienting it towards receivers rather than donors. Large estates need not attract any taxation, as long as they were dispersed among a number of relatively disadvantaged recipients. At the same time, even small estates could be taxed heavily if they were all left to others who were themselves already wealthy. Under this system of IHT, there could be no objection that the state was stopping middle-income families from “setting something aside” for their children. But, at the same time, this form of IHT would prevent wealth-transfers which greatly widened existing inequalities.

To Paul Sager and Andrew (1116/1125am). It’s no use just sticking to a line just because it’s the one adhered to by your tribe! You clearly do not have the faintest idea what you are talking about as your comments show. I have just spend three years dealing with this and I think that if you bothered to investigate you would find that you are wrong. That does’nt in itself mean that your knee-jerk reaction is wrong, but it would be well to have some knowledge to make a judgement upon.

To address the argument that the value of a home in London (and other southern regions) may already exceed the £312K allowance: the allowance may prevent transfer of a family home to a beneficiary who is unable to pay the inheritance tax on the difference, which may be personally distressing to the beneficiary but is hardly the worst thing that happens in the world. The scenario is not typical across the UK — without checking any stats, I guess that median or mean house price in the midlands and beyond is less than £150,000.

However I am sympathetic to the idea that the primary residence of a deceased can be transferred without taxation to family — as long as it is not a tax dodge and the family are taxed on any capital gain from selling existing property.

But even within the existing rules, £312K + post tax residue is a lot of money. Coming from a family of six kids, that would potentially mean £50K+ to me, which is a much bigger cheque than I’ll see unless I sell my mortgaged home or get my pension annuity. Perhaps my expectations are perverse, but I never expected a parental windfall in my fifties (when, like most people with parents worth £312K+, my wage earning potential will still be pretty good) and have lived accordingly. Equally perversely, I don’t feel resentment that my mother’s rainy day savings and home equity are being consumed at a rapid rate to fund her care home requirements. That is why they are called rainy day savings and I don’t expect the state to pay for the costs until she has no more money. But I do get seriously angry in Daily Mail fashion about cheats and wasters.

“Hey, I’m all for following Sweden’s welfare state ideas. Would you sign up to them too Tim?”

I’m on record as saying that I would sign up for many of them, yes. No inheritance tax, no national minimum wage, no national health service, a pure voucher system for education, low taxes on business. Sure, I’d sign up for those parts of the Swedish State.

Wouldn’t you Sunny?

There are also points I wouldn’t of course. For example, I thinks it’s much too monopoly capitalist to have more than 50% of the country’s stockmarket controlled by one family.

Perhaps you disagree Sunny? Or, more likely, didn’t know?

Kardinal Birkutzki, why not drench us all with the fount of your fucking wisdom rather than moaning at people? Since you’re a self-styled expert on everything, you could at least give an explanation rather than the same discredited right-wing phrases.

No-one likes paying tax. But abolishing tax is impractical, therefore some taxes must be levied. Consider two people, one of them gets £100k by working, the other gets £100k but inheriting it. Why should the one who worked for it be more heavily taxed than the other? They shouldn’t be. Also, it is economically inefficient to tax wealth-creating activity more heavily than non-wealth creating activity.

If there was a proper pro-wealth-creation progressive party in this country, they would have a policy of increasing inheritance tax to pay for a reduction in income taxes (Income Tax and National Insurance).

Cablamat, sadly I think that your example is too simplistic. Many wealth generating schemes involve more than one generation and if we taxed inheritance more than income we would find that none of our businesses would grow very far.

The interesting thing about this discussion is that these taxes are much more complicated than most people commenting give them credit for. They have evolved over considerable time with changes being made to meet (and try to prevent) avoidance mechanisms and to enhance the abilities of people to do things that we approve of (utilising exemptions and reliefs).

One of the problems with IHT is that the threshhold level did not keep up with inflation and in particular with property price inflation. The consequence was that many more people were becoming liable to a tax that would otherwise not have been levied. The Tories proposed an increase in the threshhold that would effectively restore the status quo – and Labour proposed something of a compromise that effectively made one chapeter of the books on capital taxes largely irrelevant – I say largely, because Labour only gave that benefit to the estates of spouses and civil partners.

Another problem with IHT (indeed with the increasing complication in all taxation undertaken by Labour) is that we have ended up with probably the most complicated tax system in the world. Compliance costs are huge, and the richer you are the more worthwhile it is to engage with the ‘avoidance industry’ of tax specialists. If we want ‘fairer’ taxes, first we have to define what we mean by ‘fairer’ – and the current system that in my view targets the middle and benefits the top is one that is unfair.

Couple that with a benefits system that is now divided between two separate departments (HMRC and Welfare) and we have a system that is also ripe for exploitation by people who are not interested in compliance, but in evasion and fraud.

Sadly, for those that think that targeted tax credits are a good idea, in practice my view is that they have been unhelpful and desparately need reform.

We desparately need to reform our taxation system to simplify it. Simplification will reduce avoidance and, probably evasion. Tax on incomes and capital should, in my view, only be used to raise the revenue that the Government needs; it should not be used as a tool for other purposes. For that we have public services.

The essential fallacy of the argument that inheritance tax ‘promotes equality of opportunity’ is that in my view the things that are much more likely to promote equality of opportunity are things like parental responsibility and education. Education is not the sole preserve of the state – and we desparately need to ensure that all understand that they are responsible for their own children’s education and that the state merely provides one of the tools to assist them. At the same time we need to ensure that we facilitate systems of support to help people understand that and put it into practice. None of this is cheap, but in my view the systems created in the last 10 years have not succeeded and we need to find alternatives.

Just about everyone in Sweden is a member of a Union.

Neil,

apropos of not very much (just because I think it’s interesting) I think it’s under appreciated that you can be a mainstream neoclassical economist and also a fan of unions. check out this and check out those heavyweight signatories – Kenneth frickin Arrow , Solow, Bhagwati.

So Tim, might that make you feel more comfortable about adding unionization to your list of things about Sweden that you like?

I´ve no objection to unions and never have had any. It´s called freedom of association and it´s as important a factor in a free society as freedom of speech is.

From exactly that freedom of association came many of the things which are admirable about our own English society (you can take that to mean British, UK, whatever, as you like). From footy clubs to the Royal Society to mutuals, providents, the Co-Op, the WI, folk singing clubs and groups and clubs of every type, variation and purpose.

We pretty much invented it actually, this idea that free people might associate as they wish without permission or a licence from either the State (or as it was, pre late 17th cent, the Monarchy) or the government.

A quick outline of the argument is here.

http://www.newstatesman.com/europe/2009/03/society-permission-public

My one limitation on unions being entirely fine with me is that they should not have any specific legal privileges. In the same manner that the WI, the Co-Op, the folk club or the footy club should not.

You want to get together to agitate for higher wages for the workers? Better conditions? Good luck to you. But you´ll do so from exactly the same legal position as that folk club thank you very much.

Just out of interest – if we are speaking about inheritance tax – what do you guys think about Jade’s death and the fact that she sold her soul for the huge sum of money she could give to her kids.

Tim,

That’s a cop-out, it’s like saying I have no objections to stupid statements because I believe in free speech. Believing in free speech is consistent with objecting to stupid statements. You can believe in the right to form unions and still think that unions are a bad thing, if you think that what unions do is bad. That’s an argument for another thread, mind. Sorry for derailing this one.

No, it´s not a cop out.

I have no objection to business….indeed, I´m all in favour of such. But I oppose the idea that they should have special legal privileges to, say, combine so as to increase their economic power in exactly the same way I do unions having such privileges.

So, you’d take the ‘no minimum wage’, but not the ‘specal legal privileges for unions’ part.

Nope, no cop out there, no-sir-ee.

34. John Q Publican. Good article. People who bought homes 30-40 years ago to bring up a family , not to speculate now find that their heirs will be hit by inheritance tax because of the absurd inflation of house prices. Brown has deliberately kept inheritance tax low as a form of stealth tax . This will hit Labour badly in large parts of S England and surburban areas.

41. Good comment on mixed messages. Brown has continually taxed thos save money even in private pensions ( attacked by F Field ) or medical/ care costs in old age.

Why should elderly and often infirm people, who have worked hard all their life; saved money; perhaps spent years fighting for this country, bought a house as a home – not a speculative investment, due to a massive speculation bubble go through vast amounts of worry because of inheritance tax?

umm, I don’t think liking X but not Y counts as a cop out.

Why should elderly and often infirm people, who have worked hard all their life; saved money; perhaps spent years fighting for this country, bought a house as a home – not a speculative investment, due to a massive speculation bubble go through vast amounts of worry because of inheritance tax?

They shouldn’t. And they don’t have to.

It’s the jammy sods in the younger generation, who’re getting an expensive thing for free, who bear the impact of IHT. As they should.

It does if having X is inextricably linked to having Y.

But “Hey, I’m all for ‘that’ – for values of ‘that’ I just pulled out of my arse as opposed to what ‘that’ is in the real world” is one of Worstall’s more irritating gambits.

No, scrub that, it’s his only gambit.

“It’s the jammy sods in the younger generation, who’re getting an expensive thing for free, who bear the impact of IHT. As they should.”

So having hard working, thrifty parents who think about the future makes you a “jammy sod” ??
I would say for most peoplea modest tax free inheritance won’t even come close to all the freebies and subisdies that the offsping of feckless, workshy chavs will get for their entire lives, and that’s without factoring in the costs of the inevitable prison spells, social workers, probation officers, special needs teachers, police and the social costs of the car crash that will be their lives. They get this “expensive thing” called welfare for free ?”

Most people are paying so much of their income in tax to support these people that the only hope they will ever have of owning a home or getting their kids a decent education is if they get left a modest sum by their parents.

70s style politics of envy indeed

So having hard working, thrifty parents who think about the future makes you a “jammy sod” ??

Yes. This has been another exciting round of “easy answers to stupid questions”.

No, but receiving a very large sum of money free of tax does.

A pair of bootstraps would be a better gift to hand down, no?

@51 Evan Price: Many wealth generating schemes involve more than one generation

Hmmm. I suspect that family businesses handed down the generations were more common 50 years ago than today. If it’s as business of any size, then the tax could be settled by selling shares in it. If it’s a small business such as a shop then if the revenue form the business doesn’t cover a mortgage on 30% of the value of the physical assets, it’s inefficient and should go anyway.

One of the problems with IHT is that the threshhold level did not keep up with inflation and in particular with property price inflation.

This is because both Labour and Conservatives, prompted by nimbies, refused to let enough new houses be build to satisfy demand. I guess the Labservatives think only rich people should be able to buy a house.

We desparately need to reform our taxation system to simplify it.

Agreed.

“I suspect that family businesses handed down the generations were more common 50 years ago than today.”

That’s not my experience – and indeed, the Federation of Small Businesses will not agree with this either.

“If it’s as business of any size, then the tax could be settled by selling shares in it.”

Shares can only be sold if there is a market for them. The market for minority interests in small businesses is tiny to non-existent and the result is the price that would be achieved would be negligible. Add to this the complication of valuing shares in small businesses and calculating the discount to be applied to a minority shareholding and you end up with a proposal that just won’t work.

For these reasons we already have business property relief from IHT. I assume that you’re not opposed to that.

“This is because both Labour and Conservatives, prompted by nimbies, refused to let enough new houses be build to satisfy demand. I guess the Labservatives think only rich people should be able to buy a house.”

The bubble, largely created and fed by Gordon Brown’s policies on banking and inflation, was unsustainable and bound to burst. That it survived so long is testament to his constant tinkering with numerous calculations and statistics. The reality is that if you remove housing as a factor in the equation for calculating inflation and housing inflation is one of the principles drivers of inflation, then you will end up making debt too cheap – and that in turn will feed into the bubble.

The attack on Conservatives contained in this is typical of the double-speak of many who despise the Conservatives on principle. It is an attempt to isolate ‘real’ Labour from the actions of the Labour Government and spread the blame. The reality about house starts is that they did reduce for some of the Conservative years, and yes that may have been an error; but the real reduction in house starts was in the last 12 years.

No-one sensible thinks that only the rich should own a home – having said that, it is in the UK that the rental market is reduced and home owning is so much the norm. This is another area where reform is desperately needed. But this is an argument for another blog and another day.

67. There are plenty of houses in the old industrial parts of the UK and spaces to build new ones. The problem is that there is not the employment in well paid jobs. The problem is that we did not train and educate peeople for the manufacturing of the late 20th and early 21st centuries. Instead we relied on industries requiring large numbers of unskilled and semi-skilled labour. When technology made many industries obsolete , those with the skills moved to S England. If we had spent since 1945 educating and training people to the same standards as in Germany, we would be exporting the same high value manufactured goods from the industrial parts of the UK. If one looks at cars and domestic goods , Germany produces goods in the middle and upper ranges , whether it is cars or washing machines. Consequently there would be wealthy communities in the industrial parts of the UK. This would reduce the pressure for homes in S England. In the 18 and 19 centuries the wealth of the UK was in industrial cities , not the Cotswolds or SE England. In the 1940s Bradford was very wealthy!

“we would be exporting the same high value manufactured goods from the industrial parts of the UK.”

But we do already. Rolls Royce makes one third of all jet engines used globally ….and you don´t get much more high value and high margin manufacturing than that.

@68 Evan Price: “I suspect that family businesses handed down the generations were more common 50 years ago than today.” That’s not my experience – and indeed, the Federation of Small Businesses will not agree with this either.

I don’t suppose you or anyone else has data to back this up?

For these reasons we already have business property relief from IHT. I assume that you’re not opposed to that.

I think there should be a degree IHT relief for businesses in circumstances where it would harm a going concern, yes. (And obviously any such provision should be worded to make it as simple as possible and not open to abuse).

The attack on Conservatives contained in this is typical of the double-speak of many who despise the Conservatives on principle.

I don’t despise the Tories on principle, I despise them because I lived through 18 years of a Tory government and their policies were crap. I despise Labour for the same reason.

It is an attempt to isolate ‘real’ Labour from the actions of the Labour Government and spread the blame.

A party should be judged by its actions in power, and policies in opposiiton, not by some mystical inner entity it is supposed to have.

No-one sensible thinks that only the rich should own a home

Yet despite that, the cost of buying a home is vastly greater than many can afford, and more importantly, than the amount if costs to make one. (I say make rather than build because handcrafting bespoke houses on-site as opposed to building them from pre-fabricated units is clearly outmoded and inefficient).

There’s a firm in America that makes cheap houses out of shipping containers for $8000. The average UK home is about the 2.5 times the floor area of this so on this basis ought to cost $20k which is about £14k.

Housing is not, intrinsically, very expensive. It is only expensive due to distortions of the market (particularly planning regulations) and other stupid policies. Houses, like most physical goods, can these days be mass-produced very cheaply.

But I don’t think the Labservatives care very much whether their policies work — they are more interested in whether they go down well with floating voters in marginal constituencies, and with rewarding people who’ve donated large sums of money to them.

“I think there should be a degree IHT relief for businesses in circumstances where it would harm a going concern, yes. (And obviously any such provision should be worded to make it as simple as possible and not open to abuse).”

Have a look at the law on IHT and business property relief- tell us what you think should change? Tell us how you think the reliefs should operate more efficiently and how you would make them less open to abuse.

The problem with all of this is that the law is complex – it is also a blunt instrument. People will always exploit the blunt instrument and suffer under it – it is not intrinsically a fair tool for promoting anything. Simplification will elminate some of the unfairness, but others will exploit the simplification. Diminishing returns arise from increasing the complexity as compliance costs rise and we target every smaller so-called ‘abuses’.

As to your looking at American prefab houses as an example of limiting the costs of building a house, the problem is not the cost of the house, but of the land – and to quote the proverbial sage, they ain’t making any more of it. But that is not an argument about IHT.

@72: As to your looking at American prefab houses as an example of limiting the costs of building a house, the problem is not the cost of the house, but of the land – and to quote the proverbial sage, they ain’t making any more of it.

Land isn’t expensive. Land with planning permission to build houses on it is expensive. The cost of farmland is about £5,500 an acre and you can build a lot of houses on one acre of land.

What you say is true – but there are costs in obtaining permission and there are issues regarding green belt, conservation areas, SSSI’s and other protections that need to be resolved first. Then there are the s106 agreements – and the developer’s profits – but it is the price of the land on which you can lawfully build that is probably the most valuable part of any particular property.

I don’t think that we should simply abandon planning control and other protections – do you?

I don’t think that we should simply abandon planning control and other protections – do you?

Not completely. I do think the planning process needs to be reformed to vastly reduce the cost of housing, however.

I have to say that everything that has been done to the laws relating to planning and procedure relating to planning over the last 10 years has added exponentially to the cost of it. These include the extensions to s106 agreements, the bureaucracy and procedure and the costs of litigation. Not sure that there would be a simple way of unwinding that lot as it would involve considerable reforms of all sorts of things unrelated to what we refer to as ‘planning’ – and even if it was reformed, I am not certain that it would reduce the cost of housing by very much unless much more land was, to use the American phrase, zoned for development.

70. Tim W we just need more companies like Rolls Royce.

FWIW, both Ireland and Spain also had property booms in the past decade, and planning controls in both countries were either very lax, or easily circumvented by those willing to use…extra-judicial… means.

Actually, Cabalamat’s #73 pretty much illustrates Evan Price’s wider point about valuations for IHT (and CGT purposes) – agricultural land is worth about £6k an acre, farmland with planning permission is (was?) worth about a million. What’s the value of something without planning permission, but very close to a site earmarked for expansion? It is possible to argue for any value between these two amounts, and it’s safe to say that HMRC and the taxpayer would take rather different positions.

@76: I am not certain that it would reduce the cost of housing by very much unless much more land was, to use the American phrase, zoned for development.

That’s what I’m calling for. (And for more high-density housing).

If you abandon planning controls the whole country will look like Birmingham.

People who bought homes 30-40 years ago to bring up a family , not to speculate now find that their heirs will be hit by inheritance tax because of the absurd inflation of house prices.

But that absurd inflation of house prices is also responsible for their inheritance being vastly larger than it would otherwise have been. By your logic someone would be happy inheriting an asset worth £250k with no tax bill but upset about inheriting an asset worth £350k and getting a £10k tax bill.

One of the problems with IHT is that the threshhold level did not keep up with inflation and in particular with property price inflation.

Agreed that the threshold should have increased in line with general inflation but I don’t see why it should have increased in line with house price inflation.

“Agreed that the threshold should have increased in line with general inflation but I don’t see why it should have increased in line with house price inflation.”

Then we get in to that marvellous argument about how to measure inflation.

A problem is that the cost of housing is an issue – I think we all probably agree on that. If you use CPI, you get to take into account all sorts of things, but the cost of housing is not included; take RPI and it is. It is one of the principle differences between the two measures of inflation.

So, would you use RPI or CPI as your measure? To be entirely fair, you could, I suppose, invent a whole new measure of inflation that looks at the sorts of things that people inherit – houses and land at one end, second hand cars, pictures and furniture at the other.

The problem with this part of the discussion is that we end up talking about mechanisms, rather than the principles. I happen to disagree with the original post and with many of the comments – my reasons are set out in the posts that I have made. It’s been fun, and I have learnt a lot about what others, whose views differ from mine have to say – but I think I shall leave this post alone from now on …

But I will be back to argue again!!!