Reasons inheritance tax is actually pretty soft

It appears that David Cameron still wants to raise the Inheritance Tax (IHT) threshold to £1 million.

He told a Saga meeting in Peacehaven in Sussex that: “Inheritance tax should only really be paid by the rich. It should not be paid by people who have worked hard and saved and who have bought a family house, say in Peacehaven.”

This is a loathsome policy. An editorial in the FT rightly argued: “implementing a £1m threshold for IHT would cost the Treasury more than £3bn. But reducing the burden of income tax or national insurance contributions – if there is room for such moves – would be far more beneficial for the wider economy” and that “policy makers in the developed world cannot ignore how, in an era of slow economic growth, an increasing proportion of society’s total wealth is acquired through inheritance….Redistributing inherited wealth is a painful matter for the baby-boomer generation. But it is vital if inequality is not to be exacerbated.”

However, beyond these general points there was something about the Prime Minister’s comments that aggravated me. Only the ‘rich’ should pay IHT but it is fine for people on the minimum wage to pay income tax and for virtually everyone to pay VAT. The implication seems to be that there is something uniquely harsh about IHT.

The reality is rather different. For a host of reasons it is actually a very soft tax.

1. It has a huge nil rate band already

Income tax kicks in at £10,000, Capital Gains tax at £10,900 and VAT has no threshold at all.

By contrast, estates only become liable for IHT if they are worth more than £325,000. And for many estates it is even higher than this because someone passing on an estate can add any unused part of their spouse’s allowance to their own. The result is that the threshold can go as high as £650,000.

The result is that for all the handwringing about it trapping more and more people, the Office for Budget Responsibility estimates that just 4% of homes are liable for IHT.

If homes in the South East are now being caught by this tax that says more about the unreasonable value of some houses than it does the unfairness of IHT.

2. It doesn’t apply to spouses

Part of the reason that transferring of allowances between spouses is such a big deal is that it is unlikely that someone with a surviving spouse is highly unlikely to use their full allowance. This because anything passed between spouses is IHT free.

3. Its marginal rate is comparable with other taxes

IHT is charged at 40% which is the same as higher rate income tax, which is paid by many more people.

It is also possible to lower that to 36% by giving enough money to charity.

4. It has some pretty generous exemptions

In addition to the spousal exemption I mentioned, there are a host of others. Amongst them no tax is paid on money left to charity or on family businesses and farms.

5. It is often possible to pay in instalments

Payments on land, property and certain shares can be spread out over a decade. Bear this is mind next time someone talks about having to sell a house to pay IHT.

6. Death wipes out capital gains

The tax system makes concessions to death. If the owner of an asset dies then no tax is payable on the capital gains it has accumulated up to that point. Therefore, abolishing IHT would leave a series of transactions that would fall through the system altogether.

.

I am not saying that anyone is going to be grateful for paying IHT and I appreciate that it becomes payable at an emotionally difficult time. However, as I hope I’ve made clear it is not a uniquely harsh tax. And it can’t be ignored that it was more progressive and producers fewer disincentives to work than pretty much any other tax.

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4 thoughts on “Reasons inheritance tax is actually pretty soft

  1. I can’t agree with this one. It’s harsh because it’s double taxation. The family already paid/pays taxes on those assets. Why the hell should anyone pay the government to receive the property their parents owned?

  2. Pingback: John Oliver on inequality | Matter Of Facts
  3. Why not abolish inheritance tax on estates, but tax the income people receive from inheritances over a certain amount?

    That would provide an incentive for those leaving a large estate to leave lots of small amounts rather than a large amount to one person, which is what you want if you’re trying to stop wealth ‘bunching’.

  4. Pingback: If you support ‘hardworking people’ then oppose an inheritance tax cut | Matter Of Facts

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