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6 October

What people miss when they criticise inheritance tax

Only 4 per cent of estates end up having to pay it.

By James Ball

To attack inheritance tax is to – wittingly or otherwise – defend the principle of unearned wealth passing through the generations. Such an attack prevents any move towards equality in either opportunity or outcome.

So for the City minister Andrew Griffith to refer to it as the one tax he would “most like to see eliminated” should be a horrifying statement that is tantamount to political suicide. We have been hoodwinked to oppose one of the perilously few functional wealth taxes that exist in the UK. There are many arguments against the tax, of course. It’s just that all of them are bogus.

The biggest fear of inheritance tax is that it will leave the recently widowed partner of the deceased homeless. This is, of course, a very legitimate concern. However, the £325,000 tax-free allowance is transferrable between spouses, and there is an additional £175,000 allowance relating to a primary residence. This means only homes with a value of £1m (£325,000 and £175,000, both multiplied by two) or more attract estate tax when it comes to inheritance by a married partner, or their children or grandchildren. People also tend to gloss over the fact that the 40 per cent tax rate only starts being paid after the threshold is reached: if an estate is worth £1,000,100 the inheritance tax bill is £40, not £400,000.

As a result, only around 4 per cent of estates pay any inheritance tax – whether a penny or hundreds of thousands of pounds. In other words, for every 25 people that die, only the richest one’s estate incurs any inheritance tax.

Inheritance tax is indisputably a tax on the wealthy. Critics also point out, fairly, that lots of ultra-rich people set up complex trusts to avoid it – and that the royal family doesn’t pay it at all. These are legitimate concerns, but last year inheritance tax still raised more than £6bn – around £222 for every single household in the country. That is serious and much-needed revenue.

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A common refrain is that inheritance tax is “double taxation” – the deceased paid tax all their life, the argument goes, so taxing them again is unfair. One issue with this is it’s often not true: if the deceased bought a house in the 1980s, they’ve never paid tax on its huge increase in value between then and now. And the person inheriting the wealth, through no enterprise of their own, has never paid a penny on it either.

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But even if we accept that inheritance tax is “double taxation” – so what? Lots of things are double taxed. We pay VAT on much of what we buy, despite our income already being taxed – and VAT is much, much more regressive than inheritance tax. When we buy alcohol, we pay duty on it, then pay VAT on the original price and the duty – that’s triple taxation! The world in which inheritance tax is the only double taxation is wholly imaginary.

Inheritance tax is a tax on unearned advantage: lots of people will never receive a meaningful inheritance. If you are in line for one, that is good luck alone – a windfall, in tax terms. Generally, taxing windfalls is a good thing. 

We could certainly think of ways to redesign the tax – we could give people a lifetime allowance of, say, £100,000 of tax-free inherited wealth, and everything beyond that would be taxed as regular income (with some special provisions for primary homes). We could introduce broader wealth taxes.

But until someone comes up with anything better, inheritance tax is the only tool we have in our arsenal to curb generational privilege and generational advantage. To defend scrapping it is to defend the indefensible.

[See also: Would Liz Truss dare abolish inheritance tax?]

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