The way we talk about inheritance tax is very odd

Earlier today the Conservative Party tweeted this:

This caused me to reflect that there’s something strange about the way people opposed to inheritance tax discuss it: it’s rather absolutist.

If you think income tax should be cut you’ll probably argue ‘it discourages work’ or if it’s VAT you are unhappy with you’ll probably say it ‘reduces consumption’. What you probably won’t claim is that the current levels of these taxes mean you cannot work or earn money at all. Yet that’s exactly what the tweet above and many other arguments against IHT do.

In reality, the couple most definitely can pass on something. A married couple can effectively pool their individual allowances. They would therefore be able to pass on £650,000 before having to pay a penny of IHT. That’s pretty clearly not nothing.

And indeed they can pass on an unlimited amount in excess of that. It’s just that at that point the recipients will start paying tax on it. This is no different from someone with a job earning more than £10,600 and thereby exhausting their personal allowance, so paying income tax. Few people at that point stop working. I don’t see why the existence of inheritance tax for estates beyond a certain size should not be thought of the same way.

Indeed, this strange way of talking seems to permeate all Conservative discussions of inheritance tax. Backing the party’s policy of creating another tax free allowance specifically for homes George Osbourne said that “We believe that your home…should belong to you and your family, not the taxman”. This leaves one wondering if the Chancellor believes that the VAT I paid on my laptop means it’s not mine but the taxman’s.

He went onto say it was about “the basic human instinct to provide for your children”. However, inheritance tax is pretty tangential to that. Parenthood is about a lot more than the estate you leave your children upon their death. And inheritance tax does not prevent passing on assets to them. There’s after all a difference between not being able to do something and not being able to do something without paying tax.

The dependence on emotive rhetoric that makes little sense when analysed is indicative of the weakness of this policy. It cannot survive rational scrutiny. It cannot be justified either in terms of efficiency or equality. So instead notions of parenthood are misdirected to support it. It is a feeble piece of pre-election pandering and it deserves to be roundly rejected.

3 thoughts on “The way we talk about inheritance tax is very odd

  1. I would have thought that the prospect of inheriting an expensive property would be more likely to encourage the kids to put their feet up rather than work hard…..

  2. In reality, the couple most definitely can pass on something. A married couple can effectively pool their individual allowances. They would therefore be able to pass on £650,000 before having to pay a penny of IHT. That’s pretty clearly not nothing

    But it’s money, not a ‘thing’: a solid, bricks-and-mortar thing.

    The issue is that people want to pass on ‘their family home’, the physical thing they have lived in, possibly brought their children up in, etc. Not an amount of money equal to the value of the home, minus the tax due, which is what happens if the home is worth more than £650,000 and there isn’t spare cash in the estate to pay the tax: the home has to be sold to cover the tax due.

    There are ways around this; you could defer the tax until the property is sold, for example, so the children get the home as long as they keep it but have to pay if they sell.

    But it’s not an irrational way of thinking (it is perfectly rational to value a particular piece of property, especially if it has sentimental associations as the family home, more than the money you would get for selling it), even if it is sometimes oddly phrased.

  3. (Especially given that for many (most?) estates which are subject to inheritance tax, the only reason they are so subject is because of one asset, which is of sentimental value, the family home. So for most people who are hit by it, inheritance tax actually is an absolute: because of it they cannot leave to their children the one (or at least, main) solid, physical, sentimentally-valuable thing that they actually wanted to give them. So to speak of it in absolute terms does make sense, if not for the very rich whose estate contains liquid cash or fungible assets such as stocks which can be used to pay the tax, meaning that they just leave an estate which is slightly smaller because it has been dipped into by the taxman, but for the majority, who have worked to buy a home and now wish to leave specifically that home (rather than an-amount-of-money) to their children, but who cannot because neither the estate nor the recipient has the liquid cash needed to pay the tax due and so the home must be sold to pay the tax. In that case it is a strict binary: either the house come in under the value, in which case it can be left, or it doesn’t, in which case it cannot be.)

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