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SIMON LAMBERT: How do you solve a problem like inheritance tax?


Published: 20:01 EST, 13 April 2016 | Updated: 11:36 EST, 15 April 2016




Even by the standards of Britain’s increasingly muddled taxes, inheritance tax is a mess.

So it should perhaps come as little surprise that the Prime Minister managed to find himself lambasted for doing nothing wrong this week.

His mum gave him £200,000 after his dad died and if she lives for seven years after that date there will be no inheritance tax to pay.

On the tax avoidance scale this is broadly level with saving into an Isa – it is simply playing by the rules on IHT. Still there was an almighty fuss. Why? Family fortunes: Prime Minister David Cameron found himself and his inheritance under scrutiny

One reason is because inheritance tax has become so divisive. It is astonishing how controversial and disliked it is, when you consider how few people pay it.


Is inheritance tax fair?


Just one in 20 estates pay inheritance tax now, but the Office of Budget Responsibility expects that to become one in ten by 2019.

Yet, various polls show overwhelming opposition to the concept of inheritance tax.

The most cited is an ageing figure from a 2004 Ipsos Mori poll, showing 69 per cent of people thought IHT unfair.

In contrast with popular opinion, a vocal cohort – often on the left of the political spectrum - want to see inheritance taxed more heavily, arguing that it entrenches privilege and inequality.

I can see the argument here. You’d don’t need to be a Thomas Piketty disciple to see that a problem of the haves and have nots exists.

Inheritance tax in the UK is both a social and geographical issue, it’s about prosperity but also where your house is.





The great rise of IHT has come largely due to rising property prices – mainly in the South and London. Jeremy Corbyn's home-owning North London constituents may find themselves as worried about IHT as those in the leafy shires

Those who argue for more inheritance tax point out that this is unearned wealth, so why not tax it hard?

But there is a flipside to this - that wealth being passed to them is increasingly the only way the younger generation can have any hope of living in a similar property to their family home where they grew up in.

I’ve lived in two quite different places that highlight this. My home town of Harpenden and my home area for the past decade in North London.

Long-term home-owning families in both those places will share the same concern about their children being able to afford to grow up and live there and the desire to give them what they can to help.

This is how inheritance tax manages to unite the constituents of Peter Lilley, in leafy Harpenden, and Jeremy Corbyn, in Islington North.

People work hard to provide for their families now and in the future, it’s not hard to see how they are so averse to the very idea of that lifetime wealth being taxed at 40 per cent – even if such a charge is unlikely to affect them.

But as the Tories found out when they couldn’t deliver on their promise to raise the IHT threshold to £1million when in coalition with the Lib Dems, lifting people out of the IHT net means accusations of handing money to the wealthy.

This conundrum has led to IHT becoming increasingly complicated, as chancellors seek to raise the limit without provoking accusations of helping the rich.

The culmination is George Osborne’s bizarre family home allowance, which will eventually take a married couple’s overall threshold to £1m (including an extra £175,000 each on their main residence).

One way to avoid all this is to give your wealth away, but that’s not so simple.


What would you do to IHT?


The seven-year rule exists to stop people escaping the tax net anywhere near their death bed – and that time period is deliberately heavily weighted in the taxman’s favour (albeit the tax tapers down during it).

Furthermore, most people’s wealth is tied up in their home and it's almost completely impractical to give that away for IHT purposes and continue to live in it.

(Believe me we get a lot of readers asking if they can - the answer is you'd need to pay full market rent).

So how do we solve a problem like inheritance tax?

We could keep making it more complicated, tinkering with limits on gifts, time periods and things like special family home exemptions.

We could cook up an equally convoluted personal inheritance allowance and tax everything above it as income.

Or we could look at it the other way and instead of arguing about the threshold, cut the tax itself.

One of the reasons IHT is so unpopular is its level – 40 per cent is a very big chunk. That translates in people’s heads into ‘the Government takes nearly half’.

Cut it to 20 per cent and the figure becomes much more palatable.

Less people worry about it, there’s less incentive to avoid it, and you’d probably find the genuinely rich ended up paying more, as they became much more relaxed about a smaller percentage charge.

The Government taking 40 per cent of your wealth on death sounds like something to be avoided at all costs, the Government taking 20 per cent doesn’t sound that bad.

That doesn’t play into schemes to rake in more from rising property prices, but it’s simple and sounds fair and that is a decent measure of any tax.



How do you solve a problem like inheritance tax?
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