Death - a taxing time

Research carried out by economists at the Halifax Building Society revealed last week that a third of all detached homes in the UK will be subject to Inheritance Tax (IHT). (“Detached” means not adjoining another property.)

This affects a remarkable proportion of the population and that proportion is going to grow. A million more Britons are subject to IHT than was the case in 2002. This should cause us to stop and think.

IHT is payable at 40 per cent on everything in an estate after the first £275,000 (AUS$637,200 on December 3, 2005). As inflation continues to rise at a higher rate than IHT (it is not pegged to inflation and invariably moves more slowly), more and more people are made subject to it. The first time many individuals become subject to the higher rate of tax is on their death, so many are ill-prepared for it. Many don’t think they’re worth the amount required, but their inheritors will find that the adding up of the hypothetical retail value of all the deceased’s possessions (a peculiar exercise few outside the Inland Revenue office ever carry out) puts them in it.

As the Halifax has shown, the effect is significantly increased by the fact many are pushed into the bracket by the value of their home, which has gained hugely in theoretical value since it was acquired. But the property concerned is often the home of the inheritor, too. Since the inheritor will still need somewhere to live, no wealth has actually been accrued, unless they want to emigrate to somewhere with a very different housing market.

What if an estate is passed on to someone who then dies? The “quick succession rate” provision is supposed to deal with this; if that occurs within five years, the amount due is reduced (not exempt, only reduced). But even five years isn’t that long. It’s easy to imagine a family living together in a home initially in the name of an elderly grandparent falling horribly foul of this problem. Deaths in comparatively swift succession aren’t just doubly traumatic in Britain: they can be a double windfall for the taxman, too.

Even if it weren’t becoming a great problem for an increasing number of families, the tax is wrong in principle. It is opposed to thrift and discourages provision for the future.

It discourages both work and saving. It punishes people for trying to provide for their families rather than splurging money during their own lifetime. We should encourage individuals to use the money they earn to provide for their children, not discourage it. Patrician politicians might suggest the money is better placed in their hands, as they can guarantee the future better than individuals. But this is untrue. What does the state know about provision for the next generation that the current generation does not? In saving money to give to his child, the individual is performing the most natural and laudable of parental functions - providing for his offspring after his own death. Inheritance tax deliberately attempts to exploit that desire. It’s not just a tax on death. It’s a tax on love, too.

It is a tax on capital on which individuals have already been taxed. Often, this means that the state becomes the majority beneficiary of an estate. If the individual concerned was paying the higher rate of income tax during life, in paying IHT his estate has been taxed 40 per cent on capital on which he has already been taxed 40 per cent: the state takes 64 per cent of the capital, leaving the “inheritor” with a small 36 per cent portion of the deceased’s estate afterwards (obviously, this is often split again, when more than one person inherits).

It is horribly misapplied in this country, catching a higher proportion of the population than anywhere else. IHT in the UK is at 40 per cent on everything valued over £275,000. It therefore begins at a higher rate and at a lower level than in Germany, where a 30 per cent top rate is not applied until the estate is valued at £2 million (AUS$4,634,184). In France, the 40 per cent top rate is applied once over £1 million (AUS$2,317,092). This means that it catches a large chunk of the whole population, rather than a slice of the better-off as elsewhere. As that proportion continues to rise and rise, IHT is a convenient and dishonest way of raising more revenue for the state.

Finally, IHT is inflationary. Taxing in this way causes inflation because it takes saved capital and converts it into government money, which of course the government then spends. It consumes a large amount of cash the tax generates on bureaucrats whose only job is calculating and collecting it, and tracking down those who understandably wish to avoid paying it.

Inheritance tax in the UK should be abolished altogether - as it is in Australia, New Zealand and Canada. The US plans to phase it out at a federal level by 2010. It is unjust, it deters individuals from being financially responsible as they get older, and it obstructs them in trying to pass on to their loved ones the property and capital that they have, through their endeavours, accumulated during their lives.