|
Sunday Telegraph Inheritance Tax
In a week which has seen yet further reports of significant increases in house prices Jean’s story is a cautionary one and very much a tale of our times.
Jean was a devoted daughter who looked after her widowed mother. They lived together in a flat just off the sea front in Brighton. They didn’t regard themselves as wealthy. In fact they had few savings and in many respects struggled to get by but were proud of the fact that largely due to Jean’s part time job they managed to look after themselves and were not a burden on the state. A couple of months ago Jean’s mother died. Now Jean faces not just the emotional pain of losing her mother but also a financial nightmare.
The flat has been valued at £390,000. With inheritance tax charged at 40% above the tax-free threshold presently set at £285,000 Jean has now received a tax demand for £42,000.
Even with the option of paying by instalments over a period of up to ten years this is an impossible financial burden for her to meet and as a consequence she is now forced to sell the flat that she regards as her family home.
Jean is a fictitious character but the situation I have just outlined is all too accurate. This is how the present system of inheritance tax operates. It is unfair and punitive. It often represents a form of double taxation because it is applied to assets which themselves have been acquired from earned income which itself has been taxed. Increasingly it hits people who in life have never been liable to the higher rate of income tax but in death find their assets taxed at 40%. It is a penalty on hard work, thrift and enterprise. For these reasons inheritance tax should be abolished.
The taxation of a person’s assets at the time of their death dates back to 1694. Like income tax just over a hundred years later it was a new tax introduced to help finance a war against the French.
1894 saw the introduction of estate duty which was replaced by capital transfer tax and this in turn was abolished in 1988 in favour of inheritance tax.
What is clear is that the architects of the tax never intended it to apply beyond the landed gentry or the very wealthy. It was aimed at a tiny majority of estates. Yet the effect of a strong and stable economy and the house price inflation we have seen over recent years means that inheritance tax is becoming a major issue in many parts of the country. The Halifax calculates that there are now over one and half million properties with a value in excess of the threshold for inheritance tax liability.
It is this growing category which is hit hardest by the way in which the inheritance tax system operates. Under the existing rules a gift made during a person’s life may be potentially exempt from the tax provided the individual making the gift lives for at least seven years afterwards.
This provision is used extensively by those with significant assets who can afford the best financial advice and will be able to quite legally avoid paying inheritance tax provided they live for seven years by gifting their assets. This is not an option for those whose main asset is the family home and who have limited liquid assets.
For many years politicians have competed with each other to offer voters a choice between higher or lower levels of taxation linked to increases or cuts in spending on public services. This debate will no doubt continue but it needs to be held alongside a detailed consideration of the means by which revenue is raised in the first place.
The fact that we have had a tax on death since the 1690’s is not the strongest case for its retention in the 21st century.
A modern tax system should have a wider purpose than simply raising finance. It could also encourage behaviour which is responsible and that will benefit the individual and the wider community.
Inheritance tax raises £3.3 billion. Although not a large sum in overall terms its abolition couldn’t take place without the need to raises taxes elsewhere.
I would favour an increase in the level of environmental taxes. Over recent years the income from this source has been in decline. In 1999 green taxes represented 3.6% of GDP, today it has fallen to 2.9%. To replace inheritance tax by an increase in taxation on environmentally harmful activity has the potential to change behaviour in a way that would benefit the individual, their family and the wider community.
It would be difficult to overstate the political impact of the abolition of inheritance tax by a Labour government. It would send out a powerful message as to the political direction the party intends to take.
We know that Tony Blair will stand down at some stage before the next election. The danger for Labour in electoral terms has always been that when he departs from Downing Street voters will feel that the pragmatic and modernising approach of New Labour has gone with him.
The challenge for his successor is to demonstrate that this is not the case and to show that they are in touch with the British people. There needs to be a recognition that things move on and that new issues will emerge that will need to be addressed.
One of these has to be the impact of inheritance tax with soaring house prices effecting whole swathes of the country and bringing potentially millions within its net.
Its abolition would show that New Labour is prepared to look again at the tax system to ensure that it is grounded in fairness and reflect the modern world in which we live.
| 
