Inheritance tax (IHT) is famously a ‘voluntary tax only paid by those who distrust their family even more than they dislike the Inland Revenue’. Nothing much has changed since Roy Jenkins made this statement a generation ago.
IHT contributes approximately £5 billion to UK government revenue (less than 1% of the total). The ONS estimates UK private wealth (excluding pensions) at £8 trillion; roughly half of this is in the hands of the 10% of wealthiest individuals. If just this top half was taxed at 40% once a generation then you would expect the IHT take to be ten times the size it is now. The fact remains that nearly all wealth, especially of the richest families, easily avoids the inheritance tax net.
The Covid virus and our response to it has highlighted the generational and wealth imbalance in the country. The young, while mostly spared from the disease itself, are heavily impacted by the shutdown of education and by the closing of large segments of business activity – especially in retail, leisure and hospitality – that are traditional employers of the young and gateway roles to successful careers. The lower paid, as well as facing unemployment in these same industries, have also been more likely to suffer the consequences of the disease as they undertake roles that cannot be done remotely.
This has all been well documented; however even before Covid, the relentless accumulation of wealth by fewer and fewer families has worried policymakers. As we come out of Covid there is a short window of opportunity to use the public goodwill and understanding of wealth and generational imbalances to reset policy in this area and create a fairer society. No one can now doubt that we expect the government to provide enormous financial support in times of emergency. IHT is a powerful and simple tool, not just to raise additional revenues, but to send a message that the government is serious about levelling up.
There has been recent research into imposing one-off wealth taxes. While there is merit in looking at this, the complexities of valuing the wealth of the entire nation in one exercise is daunting; the political and practical difficulties of determining how the value of a doctor’s pension or a tradesman’s inventory should be taxed are immense. The time, the administration and the squabbling that would be needed to impose a one-off nationwide wealth tax would very quickly dissipate any good will that remains from the Covid crisis. Since wealth taxes on the living inevitably penalize the thrifty and spare the wastrel they create enormous resentment.
A wealth tax could potentially raise money right away. However, the UK exchequer is in the fortunate position of being able to borrow at historically low, even negative rates; it doesn’t therefore need to dramatically raise current taxation – which indeed could be counterproductive in a recovery. It does however need to start the structural changes which will eventually bring the economy back onto an even keel. Increases to IHT are never politically popular and historically have generated little incremental revenue so have been avoided; right now, there is a unique opportunity to reset the relationship between society in general and wealthy individuals and to fairly and comprehensively tax wealth each time it is passed down from one generation to the next.
If you look at why IHT raises so little money, it is because the allowed exemptions are so broad that it takes a careless family to leave any money on the table at (typically) the time of the death of the surviving spouse. Without changing the basic structure of IHT and with negligible administrative overhead, changes such as the following could be made:
• Currently, any assets that are gifted are free of IHT after seven years (“potentially exempt transfers”). Extend this to a much longer period (perhaps twenty years) or eliminate it altogether. The USA, for instance, has no concept of potentially exempt transfers and taxpayers are required to keep a record of all gifts above a modest level for their whole lives.
• Eliminate the recently introduced main residence relief which benefits only the affluent. Review the overall level of allowances (which is currently £1,000,000 for a surviving spouse) and consider a lower threshold, but a tiered rate, starting below the current 40% but rising to 50% for the largest fortunes.
• Introduce an annual or lifetime limit on charitable giving. Controversial, but the clear message of the last year is that the biggest charity of all is the government and it cannot be just an individual decision to divert funds from government to the proverbial dogs’ home.
As important perhaps as the technical changes to IHT that are needed is the effort that should be made by policymakers to position IHT as a positive contribution to society. As we saw with corporation tax over the last decade, a strong public message that taxes are the vital lifeblood of a caring democracy can have dramatic impacts on compliance with both the spirit and letter of tax legislation. The sense that taxes raised by government are frittered away on wasteful initiatives is the biggest spur to tax avoidance.
For IHT in particular, it would be extremely beneficial if the proceeds were clearly applied to balancing out inequality and job opportunity. While hypothecating taxes is not always good policy, there is a case for a tax that is as personal as IHT to make sure that there is strong public perception that the proceeds are being used to benefit the young and the neediest. For example, ring-fencing the proceeds only to be used for the support of student tuition, trade apprenticeships, job re-skilling programs and building affordable housing.
If the public energy coming out of this crisis can be harnessed to make the necessary changes to create a fairer society then some good will have come from this terrible ordeal.
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