Inheritance tax is fair but unpopular — is there a solution?

As the Conservatives contemplate abolishing the charge, Labour is exploring a lifetime gift tax.

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David Lloyd George once laconically observed that “death is the most convenient time to tax rich people”. But though inheritance tax is paid by just 5 per cent of UK estates, it remains one of the most reviled taxes (a 2015 YouGov poll found that 59 per cent of people regard it as “unfair”). 

The right in the UK and the US have long inveighed against “the death tax”. In 2007, George Osborne thrilled the Conservative Party Conference — and spooked Gordon Brown — when he pledged to increase the inheritance tax threshold to £1m. As US president, George W Bush introduced legislation that progressively reduced the tax, culminating in its temporary abolition in 2010. More recently, Donald Trump doubled the payment threshold from $5.5m to $11.2m. 

At last week’s Conservative Party Conference, Chancellor Sajid Javid maintained this trend by revealing that he was considering scrapping the tax (“something that’s on my mind”). He added: “I do think when people have paid taxes already through work or through investments — capital gains and other taxes — there is a real issue with then asking them to, on that income, to pay taxes all over again.”

Javid’s argument may appear persuasive but it is logically flawed. Double taxation is hardly unheard of — we pay VAT on goods bought with taxed income — and it is the bequeathed estate, rather than the person, which is taxed (at a rate of 40 per cent on incomes above £325,000 or £650,000 for a couple, with new allowances enabling £1m in property to be transferred). 

If “equality of opportunity” is to be more than merely a slogan, a progressive inheritance tax system is essential to prevent privilege being automatically transferred from one generation to the next. As US investor Warren Buffett sagely observed when he campaigned against Bush’s plan, one would not choose the 2020 Olympic team “by picking the eldest sons of the gold-medal winners in the 2000 Olympics”. It would, the financier warned, create an “aristocracy of wealth”. 

Liberal thinkers have traditionally defended inheritance tax on similar grounds. Adam Smith declared that “a power to dispose of estates forever is manifestly absurd”. Utilitarian philosopher Jeremy Bentham approvingly noted that the tax deprived the successful of their property as soon as they were no longer capable of enjoying it. John Stuart Mill similarly advocated “a limit to what any one may acquire by the mere favour of others, without any exercise of his faculties”. A progressive inheritance tax, he said, would allow lower taxes on the working poor and enable increased saving. 

But arguments such as this struggle to overcome the emotional opposition of many to inheritance tax. Antipathy towards the policy is not confined to the Anglo-American right. Among the countries to have abolished inheritance tax are social democratic Sweden and Norway, India, Canada and Austria. In OECD countries the proportion of total government revenues raised by such taxes has fallen since the 1960s from over 1 per cent to less than 0.5 per cent (half of Europe’s billionaires have inherited their wealth). 

Mindful of this, the left as well as the right is contemplating reform. The Institute for Public Policy Research (IPPR) has proposed abolishing inheritance tax and replacing it with a lifetime donee-based gift tax. 

“If you’re well advised and if you can predict when you’re going to pass away it [inheritance tax] is very easy to avoid,” Carys Roberts, IPPR’s chief economist and the head of the Centre for Economic justice, said. Any gifts made at least seven years before an individual’s death are exempt from taxation, prompting many to transfer their assets in advance. Exemptions for agricultural land and unquoted business assets provide further opportunities for avoidance. 

Under the proposed new system, a new tax would be imposed on any gifts received by an individual above a lifetime allowance of £125,000. After this, they would be taxed annually at the same rate as income from labour (with an exemption for gifts between partners). The Resolution Foundation has estimated that the measure would raise £15bn in 2020/21, £9.2bn more than the current system. 

By levying tax on recipients, rather than on the bequeathed’s estate, Roberts said, the objection that inheritance amounts to “double taxation” or to a “death tax” would be diminished. Ireland, she noted, already has such a system in place through a Capital Acquisitions Tax (levied at 33 per cent on transfers over €320,000).

After a Labour Party report on land ownership, Land For The Many, endorsed IPPR’s proposal, John McDonnell confirmed that the party was contemplating the idea. “I think it’s interesting,” he told Sky News in July. “We need to have a fairer system of how we can ensure that wealth is more fairly distributed — that’s one idea and we are listening to a whole range of ideas.”

In his 2013 book Capital in the Twenty-First Century, the French economist Thomas Piketty raised the spectre of “a society even more inegalitarian than that of the 19th century, because it will combine the arbitrariness of inherited inequalities with a meritocratic discourse that makes the ‘losers’ responsible for their situation.” 

It is the UK, where wealth is even more unequally distributed than income, that perhaps best embodies this dystopian future. Britain is the land of the baronet and the banker, the aristocrat and the asset stripper. It combines the worst of capitalism with the worst of feudalism. The result is a society in which both income and wealth are grossly maldistributed, innovation is stifled and equality of opportunity remains a myth. The abolition of one of the taxes that restrains such avarice would signal a grim inheritance indeed. 

George Eaton is assistant editor of the New Statesman.