Opinion: Inheriting Tory Tax Plans

Nobody likes paying tax. But most of us accept the necessity of paying collectively for public services, and the moral obligation on those of us with good incomes to subsidise these services for those without. Most of us would also accept that, in times of serious budget deficit, any adjustments to the tax system should be made in favour of those who are, firstly, of the most limited means, and, secondly, alive.

It’s easy to make inheritance tax sound unfair. Just describe it as “double taxation”; a second tax on income which has already been taxed. But the other way of looking at it is that it’s simply a higher rate of tax on income which you don’t get round to spending during your lifetime. And taxing income that you don’t “need” doesn’t seem so unfair.

Secondly, describe it as a “death tax”. None of us can avoid dying. But does this make it unfair? Only if you think that tax avoidance is a right earned by those who try hard enough.

Thirdly, give the example of large family homes, passed down through generations, and where paying part of the home in tax isn’t possible. But people in this situation have plenty of time to plan for this one-per-generation tax bill, and it’s hard to feel much sympathy for those who complain that their hereditary right to wealth is threatened.

One obvious solution to the perceived unfairness of inheritance tax is to collect it as income tax from the recipients of the inheritance. This would have the secondary advantage of encouraging the tax-averse wealthy to bequeath their assets to lower-rate taxpayers and to charities, encouraging redistribution of wealth in a society where inequality seems to be inexorably increasing.

However, the solution proposed in the Conservative manifesto was to simply decrease the amount of inheritance tax collected, which, even if you don’t like the concept of inheritance tax, seems impossible to justify under current conditions given that the burden would inevitably pass to the less wealthy.

Looking optimistically at the agreement thrashed out between the Conservatives and the LibDems this week, David Cameron and his negotiators must have known that this inheritance tax proposal was unjustifiable, and will be pleased to have found an excuse for dropping it without facing the full wrath of the more right-wing elements of their party.

And their acceptance of the LibDem policy to increase the personal allowance – which decreases taxation slightly for almost everyone, but making the most difference to the least well off – is a cause for celebration by everyone.

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  • Its interesting that raising basic rate allowance much faster than inflation was a Thatcher policy (taking people out of tax)… And raising it at or below inflation a Blair/Brown policy.

    More seriously the whole employee NI should be looked at- totally unfair that by earning just a little more (around £5,700- affects some part timers) you pay £600 more tax in one go. NI is just a 2nd income tax, and should be incorporated into income tax, which would make whole system much fairer

  • Matthew Doye 13th May '10 - 11:37am

    Conservative objections to inheritance tax just repeat the same talking points that Republicans in the USA use, even some of the same words ‘Death Tax’ etc..

  • You raise an interesting idea counting inheritance as income and taxing it as an income tax.

    Inheritance tax is just that. It is in fact not a death tax. An elderly woman I knew died many years ago. She left her estate to her 3 grand children, with the provision that her asses were only sold after the death of her younger sister. 10 years after the elder sister dies, the estate was sold. The first share of the estate went to charities tax free. The remainder of the estate that was inherited was taxed. Not the death. Not the whole estate. It would seem more equitable if the inheritors were to pay tax on their inheritance rather than the whole estate. It would make it sound less like a “death tax” if nothing else.

  • The reason calling a ‘death tax’ is obviously disingenuous (and a trick from American political discourse the Tories should never have ‘inherited’) is because, quite simply, dead people don’t pay tax; the tax burden falls upon those who are inheriting the money/estate value (it’s they who lose out) hence the name /inheritance/ tax.

    The second thing to point out is that inheritance tax is a lot less than if the value of the estate (assume it was entailed to one individual) was assessed under capital gains tax. Inheritance tax is a gift – like limited tax-free money transfers – it is set up in such a way that you don’t pay tax.

    The Tory case for changing inheritance tax is not that it is unfair across the board but rather that the current threshold is too low (maybe; I inherited money from an estate which feel about the inheritance tax threshold and like everyone else I’d rather I paid less tax than more) and that “people should get to pass on family homes”. The second of these arguments seems to me to be sheer Bridesheadsian whimsy. The former if it has any merit at all has merit only in ‘happier days’. The government needs money. It seems fair to tax people who a) can afford it and b) are better off that the exchange took place regardless. When a tax is set up along these lines it seems sensible not to abolish if the government is simultaneously trying to pay down record debt. There’s no reason to think (unlike VAT, say) that inheritance tax could make the poorest people worse off. There’s no reason to think it might act (unlike income tax compared with benefits, say) as a disincentive to work. There’s little reason to imagine that it hinders investment activity – it is a ‘safe tax’ for the government to gain revenue from. If anything, during an attempt to reduce the deficit, the government should lower the inheritance tax threshold or increase the burden. If some ‘properties which have been in the family for generations’ fail to get passed on that’s very sad, but presumably that means the liquid assets over and above the property itself weren’t sufficient to pay the tax and, like Lord Marchmain, if you can’t afford to keep the property there’s nothing the state is obliged to do to help you – nothing lasts forever. To think otherwise is to demand some sort of ‘welfare for the wealthy’ which is just plain silly.

    If you think that the government needs to tax people, taxing inheritance is a good idea. If you’d rather inheritance was taxed specially – as a complex gift-like arrangement – rather than as straightforward capital gains then you ought to support inheritance tax.

  • George W. Potter 13th May '10 - 1:02pm

    I would prefer it to be raised slightly to match the increase in house prices over the last few years but I certainly don’t think it should be anywhere near as high as the tories want.

  • Matthew Huntbach 13th May '10 - 10:48pm

    To say that inheritance tax is “double taxation” is ridiculous. Taxation is on income flow. Ten pound notes do not come stamped “tax already paid on this one”. I pay income tax on my earnings, if I use what is left to pay someone to do a job for me, they pay income tax on that.

    If someone inherits a house and needs it, they are in a very much better position even if the inheritance tax is paid by taking a mortgage on it than they would be if they had to buy a hjouse from scratch. If they do not need it because they have a house already, it’s just a massive dollop of cash when they sell it. Why on earth shold someone who gets a massive dollop of cash like that pay not tax on it, when people who slave for years to get that much money have to pay income tax on what they earn?

    The high cost of housing, caused to a large extent by it being a very valuable investment because it is so lightly taxed is anti-family. It leads to people hanging onto houses they don’t need as an “investment”. It leads to misery and broken families amongst those who cannot afford sufficient housing for their family needs. Higher taxation on housing but with allowances and susbidies for those with need would massively improve family life and hal the broken society in this country. But Tories can’t see this because they are rich hypocrites, protecting their own wealth will come WAY above what is needed really to deal with the “broken society” they cry crocodile tears over.

    All these public schoolboys and millionaires who are stuffed into this cabinet are CLUELESS about life as lived by ordinary people. They are egged on by the clueless public schoolboys and schoolgirls and voices of millionaire media moguls who form the “commentariat”.

    So perhaps I am wrong to describe these people who want to cut inheritance tax and yet claim to be the party of the family as “hypocrites”. Perhaps they really do believe what they are saying, it is just they are so out of touch with ordinary life, they can’t see it, and no good even at the economics of housing. I remember Cameron in one of the leadership debates saying some thing about taxes making it harder for for people to buy houses. That is economic illiteracy. There is no commission which sits down and decides what house prices are to be, then everyone has to pay those prices whatever. House prices are whatever people are willing to pay for them. Put a tax on buying a house, then people cannot afford to bid so much for it, so teh prices comes down to meet it. That’s basic free market economics.

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