Friday, September 5, 2008

Inheritance tax - what's the point if it's just for the super rich?

The Tories are reported to have decided on a major increase in the IHT thresholds if elected. Why?

At the moment the first £312k of an estate is exempt from IHT (Inheritance Tax). The Tories had previously pledged to increase this 'nil rate band' to £1m. The £2m figure quoted in the press arises because the 'nil rate band' can now be transferred to the surviving spouse when a husband or wife dies. (And yes, the same rule applies to civil partnerships).

At this level the number of people whose estates will be subject to IHT when they die will be just a handful. Yes? Well, how different will that be to the current position?

According to HMRC figures reported in the press, only 44,000 estates actually paid IHT in 2007-08. That amounts to around 7% of the number of people who died in the UK and that percentage is likely to fall significantly now that the nil rate band is transferable. And that reduction was the rationale for introducing the transfer option. This all means that there is no reason to assume that IHT was about to start hitting hundreds of thousands of families each year. Anything but. So why the fuss?

Last year the Express newspaper group mounted a death tax crusade - effectively a campaign for the abolition of IHT. When the Chancellor announced that the nil rate band would be transferable the Express claimed victory. The Taxpayers' Alliance has mounted a similar campaign. Populist and simplistic nonsense? Maybe.

Now is not the time to explore the arguments for and against the principle of IHT - or a variation thereof. It was introduced in 1986 just a few years after I started out as a tax adviser. Previously, from 1974, we had a Capital Transfer Tax, the top rate of which was reduced to 60% in 1984. And before that simply 'Estate Duty' (introduced in 1894) .

You might think that I would be in favour of taxes that are designed to only hit the super rich, as members of the Tax Advice Network would be engaged to help with the related tax planning (and minimisation). Sorry. Such taxes are simply a sop to what has been termed the 'politics of envy'. With such taxes the populist aim of trying to tax the super rich has been satisfied in theory but in practice the sums collected will be relatively insignificant. The time and effort required to manage, update and administer such taxes could all be used to greater effect.

Having said that I couldn't in all conscience argue for the total abolition of all forms of IHT either. As I said to the Editor of the Daily Express last year:
"You seem to be calling for the abolition of a hated tax without drawing attention to the consequential need to either increase taxes elsewhere or to reduce Government spending. I am no defender of IHT but I' d be wary of raising public expectations that a tax could be abolished without any related consequences."
So, rather than watch politicians simply moving the goal posts I'd prefer to see a decent public debate as to the options and the arguments for and against each of these.

[I was going to stop there but I am aware of a booklet "How to defend Inheritance tax" - published by the Fabian Society in association with the TUC. Many of the themes therein were, it seems, first aired at a seminar on 'The ethics and politics of inheritance tax' (hosted by the Public Policy Unit at Oxford University in September 2007). So maybe that debate has already started]

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