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26 September 2023

Rishi Sunak is not serious

Cutting inheritance tax is a sure way to perpetuate wealth inequality and hinder economic growth.

By Harry Lambert

Rishi Sunak and his cabinet are not serious. I expect they are sincere: they will probably commit to cutting inheritance tax before the next election, as was reported in the Sunday Times last weekend. But they are not, as Logan Roy would have it, serious people. Cutting inheritance tax is an act of national self-harm. Only a dying government would propose it.

We recently ran a cover piece on the UK’s tax system. In that feature I described a tax code that punishes work at the expense of wealth, poorer homeowners at the expense of richer ones, the tenant in favour of the landlord, and anyone who does not inherit capital, almost all of which is passed on untaxed. Only 3-4 per cent of the £120bn in gifts and inheritances passed on in the UK each year, I wrote, is taxed.

That final fact is galling. A society that scarcely taxes capital as it is passed between the generations puts great importance on the pot luck of inheritance. We know what “inheritocracies” look like: just try reading a 19th-century novel. Sunak’s mooted plan to cut inheritance tax (or IHT), which allows couples to transfer £650,000 (or £1m in property) tax-free, would only bring such a reality closer.

Over the past six decades growth rates have generally been falling in the UK. The rate of return on capital has, meanwhile, remained high. The first fact prevents unpropertied workers from turning their labour into wealth. The second ensures that the wealthy need not to labour in order to stay rich.

What Britain needs to do is redress this malady through the tax system, not perpetuate it. A government that cared to spread prosperity in Britain would not be cutting inheritance tax but scrapping it entirely. We should replace it with something far more effective: a capital acquisitions tax (or CAT).

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[See also: Inheritance tax is more popular than the right thinks]

A CAT is a tax levied on anyone who receives capital in gifts or inheritances over a certain threshold. Ireland – the Celtic Tiger itself, that supposed engine of capitalist dynamism (or rather of tax-efficient conglomerates) – has a CAT. Unlike inheritance tax, which is levied on the estate of the donor after their death, a CAT is paid by the recipient of wealth whenever it is bequeathed. This circumvents the most common objection to inheritance tax, one voiced by a partisan official in the Sunday Times, that it is wrong to tax people “at a time when they are grieving”. Trevor Phillips raised this line of argument on his Sky News show on 24 September.

Sunak’s government should, by that reasoning, be keen to move to a capital acquisitions tax. Doing so has a notable advantage: it would actually tax wealth as it moved between generations. The great problem with inheritance tax is that the very richest can afford to avoid it, perfectly legally, by passing on capital at least seven years before they die. 

There are other ways to avoid it. You can invest in the AIM stock market or buy property that qualifies for agricultural property relief. By doing the latter (and taking advantage of another scheme called business property relief), the very richest – those with estates in excess of £10m in the UK – pay an inheritance tax rate of only 10 per cent on average, despite inheritance tax nominally being charged at 40 per cent. 

The current inheritance tax system, in short, entrenches wealth inequality. It mocks the idea that we live in a society committed to social mobility. The dice are loaded: a few inherit, tax-free; most do not.

Under Ireland’s CAT, in contrast, recipients pay a tax of 33 per cent (less than the 40 per cent the British pay in inheritance tax) on any capital given to them at any time, above a tax-free threshold of €335,000 (£291,000). That tax rate has risen in recent years, not fallen, nor been proposed for abolition, as briefed by Sunak’s team.

Moving to a CAT would be a subtle change but lead to a major difference: the wealthy could no longer pass down vast sums, in the form of houses, art, jewellery, cars, company shares or anything else, and expect to avoid tax by simply doing so ahead of time.

The great majority of Brits would not receive enough in gifts to pay a CAT if it was set at the same level as Ireland’s. But those that do – not least Rishi Sunak’s children – would, at last, contribute to the Treasury as they inherit great wealth. The wish to pass down capital is natural. The abnormality is a tax code that allows the very richest to do so tax-free.

[See also: The return of the free-market right]

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