Why we should get rid of inheritance tax

I am fortunate enough to have attracted an extremely well argued response to my inheritance tax column. It's by Tom Freeman on his blog Freemania.

He accepts my argument that passing money between the generations is a useful activity, and likes my analogy with the environment (our children inherit the earth). But then he makes the entirely reasonable point that while everyone enjoys the environment only some people (a very small number) will enjoy inheriting my estate.

So, he argues, it doesn't seem that unfair to spread a portion of my estate round to all those who weren't lucky enough to inherit it. I don't think I've distorted his argument, but he put it better, so you might care to read it.

I cannot respond to Tom with an absolute point of principle. There is no slam dunk argument that makes inheritance tax unthinkable. Of course you can argue, as Tom does, that it's only fair to pass a portion of my estate around. And you have to raise the money from somewhere.

So my response is pragmatic.

Inheritance tax raises a very small amount of money. But it costs those who pay it a very large amount indeed. It looms for those people as a very burdensome impost indeed.

Now, this wouldn't be much of a problem if the number of these people was small - the tax is only paid by 6 per cent, after all. And for long periods inheritance tax wasn't much of an issue, for this reason.

But now things have changed. Now, 37 per cent of households are above the threshold. Any of them could die and have to pay the tax at any moment, even if, in practice, they won't all die at once.

So inheritance tax sends out a big behaviour signal to a very large number of people. It discourages saving and tells them that inheritance doesn't matter. And all this to raise a pittance.

My estate has already been taxed. It was taxed when I earned it. I already bought an education and health care for other people's children. I did it gladly but I did it already. Inheritance tax is a tax, an extremely heavy tax, on the pure act of passing my money on to my children. And that is an activity I want to encourage, not discourage.

Comments

[Tony Francis]

Dan, it seems to me that the Inheritance Tax is the most medieval of taxes. It goes back to the Norman proclamation that "everything belongs to the King, and reverts to him upon death." It is also steeped in envy. Having just settled my mother's estate, it proved to be a boon for the lawyers and accountants. I have a law degree, but the laws are so arcane, I didn't know what was going on half the time. Despite having them on the case, I still ended up paying late fees and penalties. The really rich, like Warren Buffett and Bill Gates say they are all for the inheritance tax. But in the end, shift their money to Charitable Trusts. Other ultra- rich shift their money to Samoa, or some other place to avoid the tax. So it turns into a tax on the upper middle class, and not ultra-rich. It is a tax on farms and businesses. It is a tax on the discipline of some not to spend every penny they make, or to borrow money. In the US, once the threshold is reached, it is over 60% with State and Federal taxes. In my opinion, it isn't luck. In my mother's case, it was about 1% luck and 99% contribution from her personality which was steeped in creative saving. I took care of my mother for seven years before she died: cleaning, cooking etc. So the state was saved the burden of her expenses. I could have gotten along without her inheritance. But then, so could the state.

[Mauro Pereira]

Very interesting post!

Mauro

URL:http://www.jspsciences.blogspot.com

[Jo]

The number of people who pay inheritance tax is small. In fact its very small. In fact its zero.

How can you complain about paying a tax when your dead?
Would you rather they took 50 grand of you now Daniel?

[Adam]

I think Tony has got this spot on.

The ultra-rich do not pay inheritance tax. It is quite simple to move you money into a trust for the children to gain and thus avoid the tax, especially if you can afford top tax accountants. For this reason, I think you will find that many of the 6% will come from the middle class and not the ultra-rich.

We should either stop the loop hole or get rid of the tax.

[pregethwr]

Yes why should unearned winfalls be taxed. better to move the tax onto other sources of income like... erm... any ideas?

[Steve]

Is inheritance really "a transfer from old to young"? (Previous column)

Mostly it seems to be a transfer from dead to late middle-aged. To cancel it now would mean finding tax from elsewhere; presumably this would affect "young" people more. Not to mention the 94% of estates too small to be eligible. Ought they to pay up so that others can keep even greater unearned windfall property gains?

[adam]

That '37% of households are above the IHT threshold' stat is a little bit dodgy because that household wealth is typically shared between two people. Not only does this mean that far less than 37% of people have an estate above the threshold, but also even for many of those with estates above the threshold IHT won't be chargeable as the estate will typically be left to the spouse/partner.

And if you really want to avoid IHT, give your money away before you die. Simple as that.

[Paul]

"Inheritance tax raises a very small amount of money" - +/- £4,000 million. It helps contibute to the cost of our troops in Iraq or Afghanistan...

[Danivon]

Well, the Tories are saying that they will scrap this tax, and levy higher ones on flights.

So, I work hard to be able to afford a nice holiday once a year in the sunshine, but it'll be more expensive so that the children of millionaires don't have to pay tax on money they didn't earn at all.

No tax is 'fair', in the same way that to teenagers, life isn't 'fair'. But inheritance tax, perhaps at a higher threshold (say double the average house price) is hardly going to put people into penury.

Close the loopholes and increase the threshold, and hopefully middle classes can concentrate on real problems for a change.

[David]

If you're so keen on giving your children your money, why not give it them now and ask them to give you back whatever you may turn out to need over the coming years? So long as you live seven years, that'll work fine. Or don't you trust your offspring enough?

[Stephen Webb]

The problem is that the inheritance tax threshold relates to the size of the deceased's estate, rather than the recipient(s)'s. I would rather a miser's fortune be spread amongst his penniless children tax-free while a poor pensioner's small estate is taxed before being split between prosperous offspring.