INHERITANCE TAX is not only double taxation on the middle classes, it is an expensive and ineffective way of raising government revenue. With the cost borne primarily by the grieving, who have enough to occupy them without additional paperwork and valuations to appease the avaricious taxation office.
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 minimise 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.
Improvements to a property will normally attract VAT, paid out of earnings that have already paid tax, that makes inheritance tax a triple taxation on items such as double glazing, conservatories and solar heating.
According to HMRC, in 2019-2020, 90% of estates paying inheritance tax had net assets worth £1 million or less, mostly held in residential property and cash, and the average tax paid was £216,000. This is hardly “taxing the rich”.
So, why is our government claiming it wants to ‘level up’ the country when it is also taxing (at 40%) 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 ‘unearned’ income.
While UK financial services are very good at raising capital for growing or established businesses, the initial seed capital is hard to find unless an entrepreneur already has a good track record for starting businesses, or is a homeowner willing to re-mortgage their family home. 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 into tax revenues through consumption taxes.
While socialists might wail that this is not fair for people whose relatives have no assets, one of the reasons 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% 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 length and complexity of the UK’s massive tax code. The only people who would complain would be the accountants who have made a career of finding ways to help their clients avoid inheritance tax.
Getting rid of inheritance tax would 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. It 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’.
Brexit means the UK no longer has to pay 80% of customs duties and agricultural levies to the EU, worth about £2.64 billion; 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. This would be a definite Brexit benefit that even the most ardent Rejoiners could support.
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