IT IS THAT TIME of year again when everyone is suggesting reasons for tax cuts or tax rises in Wednesday’s budget. I would like to add my voice to team tax-cuts.
The tax I would most like to see removed is inheritance tax. Why? Besides being double taxation on the middle classes, it has caused a perverse incentive that encourages lifestyle farmers to buy agricultural land.
Life-style farmers buy farmland because it is exempt from inheritance tax, and it is often the best farmland because it is closer to the large cities where they actually live. Then the lifestyle farmers complain they can’t make money from their farms without subsidies from taxpayers and protection from hardworking, efficient, unsubsidised farmers in other parts of the world.
The most recent example is the UK’s trade deal agreed with New Zealand where the Country Land and Business Association, the National Farmers Union, and even the Red Tactor label have complained a trade deal that could lower prices for millions of consumers is somehow unfair. Red Tractor has even been caught posting misinformation on social media about New Zealand farming standards in an attempt to ward off UK consumers from buying less expensive meat.
New Zealand doesn’t have lower standards of agriculture – it sells products all over the world to the standards required of it – but it does have a lower currency, no subsidies, and no inheritance tax.
New Zealand farmland is valued for its potential returns from farming, not as a store of subsidized, inheritance tax free wealth, inflated by television presenters, City lawyers and other lifestyle farmers. The problem with lifestyle farmers owning farmland is they don’t need to farm profitably because farming is not their primary source of income. They are content if government subsidies are just enough to cover the running costs of the farm, while their children’s school fees, their holidays, their cars and their clothes are covered by their TV company, law firm or even parliamentary salary.
Some on team tax-rise may suggest this is a reason for removing inheritance tax exemptions from farmland – but this would hurt the few real farmers in the UK who hope to pass their farms to their children. It could also cause the break-up of the few farms in the UK that are large enough to be viable without government subsidies and compete internationally. The average UK farm is only 81 hectares, in New Zealand the average is 153ha, while less than 20 per cent of UK farms are over 100ha. The better solution to getting lifestyle farmers out of farming would be by removing inheritance tax on all assets, thus making alternative, probably higher returning (and certainly less work), investment opportunities equally attractive.
Besides, Inheritance Tax is an expensive and ineffective way of raising government revenue. Most people assume that inheritance tax is breaking-up the grand estates in the UK and originally when introduced it possibly achieved that aim. Now, however, most extremely wealthy people in the UK have found ways to minimises any inheritance tax due. Instead, inheritance tax has become a middle-class tax on assets bought using earnings that have already been taxed. This is double taxation.
According to HMRC, 95.7 per cent of estates paying inheritance tax have net assets worth less than £1 million, mostly held in residential property and cash, and the modal net asset value is between £100,000 and £200,000. We are hardly “taxing the rich”.
So, why is our government claiming it wants to ‘level up’ the country when it is also taxing (at 40 per cent) the small amount of capital most people on PAYE will ever amass? Unfortunately, most people working for a fixed wage are just making enough to pay their bills, so they can never amass the capital required to start a business or buy their own house. Inherited wealth is one of the primary sources of seed capital for new businesses. But if there are several beneficiaries there may not be much left after the government has taken its ‘unfair’ share.
While UK financial services are very good at raising capital for growing or established businesses, the initial seed capital is hard to find unless the entrepreneur already has a good track record for starting businesses. Someone who merely wants to become their own boss has little chance of doing so other than with inherited seed capital.
Similarly, when buying a house, for most employed people the mortgage is not the problem – finding the deposit is the hard bit especially if you don’t have a bank of mum and dad or inherited capital. But even if people decide to blow their inheritance on expensive clothes and fast cars, this will help other people’s businesses (and the economy) to grow and feed through to tax revenues through consumption taxes.
While team tax-rise might wail that this is not fair for people whose relatives have no assets, one of the reasons that they have no assets is probably because they have never had the means to create some. We can’t ensure that everyone gets the same benefits from a tax change but starting the process of enabling people to amass capital will benefit the whole economy.
Compared to Income Tax, National Insurance and VAT, Inheritance Tax is expensive to collect, but, according to the ONS, only raised £5.4 billion – just 0.9 per cent of total tax revenue in 2020/21: income tax raised £194 billion; National Insurance £143 billion; and VAT £130 billion.
Getting rid of inheritance tax would also make at least a small reduction in the UK’s massive tax code and even make the UK a more attractive place for the world’s wealthy to base themselves, bringing custom to UK businesses, shops and services. Sweden has no inheritance, estate, or gift taxes. They abolished them in 2004 and many wealthy Swedish families who had moved out of Sweden due to its high taxes, have now returned.
The choice is really – would the government spend your inheritance better than you would – and the answer from most people would be a resounding ‘NO’.
Another question is whether leaving farmland as one of the few inheritance tax-free investments has made UK farms more productive, more export oriented or more efficient – and I am afraid that the answer is also a resounding ‘NO’.
Brexit means the UK no longer has to pay 80 per cent of customs duties and agricultural levies, worth about £2.64 billion, to the EU; nor do we have to pay the EU over £3 billion from VAT payments. This totals almost exactly the same amount raised by inheritance taxes – so let’s drop inheritance tax and see if spreading small amounts of seed capital around the country can help grow some new businesses, as well as getting the lifestyle-farmers out of UK agriculture.