20 March 2018
An unpopular tax
Over the years we have spoken to many clients about Inheritance Tax planning. Many have been reluctant to discuss the subject of their eventual demise, others merely dismiss it as their children’s problem. It is somewhat surprising therefore that surveys show that IHT is the most unpopular of all taxes and that most people (even those who will never pay it) believe it is intrinsically unfair. This is an attitude that seems to prevail in most of the Western democracies. President Trump has pledged to abolish ‘Death Taxes’ and even egalitarian Sweden abolished Inheritance Tax in 2004.
In this country, tax on deceased persons’ estates goes back at least to the seventeenth century. By the middle of the eighteenth it was called Estate Duty and remained as such until it was replaced by Capital Transfer Tax in 1975. Initially CTT was charged not only on deceased persons’ estates but also on lifetime transfers above a set cumulative total. By the time it was replaced by Inheritance Tax in 1986 most lifetime transfers had become exempt if not made within seven years of death.
It is a testimony to the unpopularity of IHT that successive governments have sought to minimise its effects. In 1986 the first £110,000 of a person’s estate was exempt from tax. This has now risen to £325,000, which is now transferable from the deceased person to the surviving spouse. Public opinion has also shaped government policy to the extent that an exemption for the value of the family home is now being phased in. The result is that from 2020 many couples will be able to pass on assets to the value of £1 million free of tax.
Three generations ago the average Briton was more likely to pay Estate Duty than Income Tax. Now only 20,000 estates pay IHT each year. About £80bn is passed on each year by deceased persons, but IHT of only £5bn (0.7% of all tax revenues) is collected.
Ethics and politics
The theory of estate duties has been debated over several centuries by some of the world’s most respected philosophers and economists, including Jeremy Bentham, John Stuart Mill and Adam Smith. By some it is seen as fair and pragmatic. Deceased persons have no rights, can express no opinions and most importantly cannot vote! What they leave behind is a windfall for their beneficiaries so why should society as a whole not take the opportunity to benefit?
The case is also made that estate duties promote fairness and equality in society because they reduce the passing on of inherited wealth and thus work against the entrenchment of a hereditary élite. Those of us who visit stately homes owned by the National Trust are the practical beneficiaries of this theory. On the other hand, if you visit the echoing, unfurnished châteaux of France you will see this idea played out to its undesirable extreme.
Another point made in favour of IHT is that, unlike taxes on income, it does not diminish one’s incentive to work. In spite of this there is no evidence that people generally work or save harder to leave money for their children, so the motivational aspects of IHT (as opposed to Income Tax) remain to be proven.
There is a popular view that people should have the right to dispose of their wealth as they choose. Wishes they have expressed during their lifetime must be respected post mortem and the state has no right to take a slice. However, academic research has shown that a large proportion of inheritances are accidental; people save to insure against personal risks such as end-of-life care but not all of their funds are used and are therefore unintentionally passed on to their families.
On the question of constraining the growth of a hereditary élite, it is often pointed out that privilege is nowadays gained more frequently by education, entrepreneurial flair, gifts and even marriage. Furthermore, wealthy people have always found ways of avoiding or at least mitigating IHT.
The most frequent charge against IHT is that it is inherently unfair because it is levied on funds that have already been taxed. If it has been saved out of earnings it will already have suffered Income Tax. If it has been inherited from an earlier generation it might have previously been subject to IHT. Regrettably no rule has ever been established that states that tax should not be levied more than once on the same assets; such a rule would undermine the concept of VAT.
The future of Inheritance Tax
The Institute for Fiscal Studies has expressed the opinion that IHT is too complex and collects an insignificant amount of tax. Were it not for the persistent national debt and the pressure on public services, we could very well have expected its imminent abolition. However, with a budget deficit of 3% of GDP, the possibility of a left-of-centre Labour government, and £80bn of only lightly taxed deceased persons’ estates, IHT may yet see a new lease of life.
If you haven’t made your will, or recently assessed the value of your assets, perhaps now is the time to seek our advice. Whether or not you are in favour of Inheritance Tax, there is every reason to arrange your affairs legally to mitigate its effects.
As one of the leading firms of accountants in the North East, with offices in Newcastle, Sunderland and Jarrow, we have the expertise to advise you on a wide range of tax related issues. If you would like to speak to one of our local experts, please contact us.