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28 May 2007

Inheriting an unwelcome tax

Peter Wilby predicts a clever Clause Four moment

By Peter Wilby

I have an uneasy feeling about Gordon Brown. Everyone expects some dramatic gesture when he takes office: withdrawal from Iraq, perhaps, or commitment to a fully elected upper house, or President Bush burnt in effigy on the steps of No 10. I fear it will be none of these. Instead, it will be something we lefties won’t like at all, but which Middle England, the constituency where Brown is weakest, will greet with acclaim.

Might it be the abolition of inheritance tax? I have no evidence that Brown has any such intention, and, as an egalitarian, I cannot think of a worse idea. But nothing would better establish a new prime minister’s credibility with the Daily Mail-reading classes, and produce the fury on the left that would make his new Labour credentials unimpeachable.

The financial cost of what might be Brown’s very own Clause Four moment would be small: the tax raised only £3.6bn this past financial year, or 0.7 per cent of Exchequer receipts, and its abolition could be phased, as is happening in the United States.

At present, it affects just 6 per cent of all estates, but that isn’t the point. Fear of falling into the inheritance tax net obsesses the property-owning classes as house prices rise. Those same rising prices, excluding many young people from the housing market, make parents all the more determined to pass on wealth to their children. As Chancellor, Brown has shown some sympathy with inheritance tax opponents (who have cleverly renamed it “death tax”) by raising the threshold from the current £285,000 to £350,000 by 2010.

If it decides to act, a Brown government has several options. It could adopt a Fabian Society proposal to tax the recipients of inherited wealth, rather than the estate of the deceased. If the inheritance were taxed as income, this would encourage people to spread their bequests and bias them towards the less affluent, while undermining the abolitionist case that inheritance tax penalises saving. Or Brown could follow the Liberal Democrats, who are considering, instead of inheritance tax, a wealth tax on houses worth £1m or more. As I wrote here last week, inequality has become a middle-class preoccupation. Anything that penalises the super-rich while benefiting the modestly affluent would be political gold.

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I have another idea. As Lord (Andrew) Turnbull, a former cabinet secretary, points out in a new pamphlet published by the Social Market Foundation (The New Demographics: reshaping the world of work and retirement), the argument over who pays for old people’s care remains unresolved. “The dividing line between costs of personal care (paid, subject to means testing, by the individual) and medical care (paid by the state) is blurred, and the difference between England and Scotland (where all care is free) is bitterly resented.”

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Again, the issue is inheritance. Old people fear that, forced to sell their homes to pay for care, they will have nothing to pass on to their children. But, as Turnbull argues, the taxpayers being asked to fund the care are often less affluent than those hoping to inherit their parents’ estate in full.

So here’s my answer. Re-establish free personal care for the elderly and fund it from inheritance tax receipts. Given that personal care costs roughly £11bn annually (of which £1.6bn is recovered in means-tested payments) and given that this is likely to rise sharply, the government would need to raise perhaps four times as much from inheritance tax. But I don’t see a problem. First, by removing costs of care from general taxation, the government meets the rising bills from the accumulated wealth of the deceased rather than from wealth generated by the current working population. Second, it has a sufficient budget surplus for a 2p income tax cut. Third, the disincentive to saving created by means testing disappears. Fourth, the heirs’ disgruntlement at the prospect of paying increased inheritance tax is offset by the certainty that the estate will not suffer the near-100 per cent penalty that care charges entail. Fifth, the tables are turned on opponents of the tax: they are now the heartless ones who, by cutting off the revenue stream for free care, would force old folk to sell their homes.

As a former chancellor, Prime Minister Brown will not like what amounts to a hypothecated tax. But, as demographers keep warning, the costs of the chronically disabled elderly are likely to spiral beyond control. This nettle should be grasped immediately.

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