Why Inheritance Tax Must Go

The former Cabinet Minister, Stephen Byers, declared in mid-August that inheritance tax should be scrapped as it is a ‘penalty on hard work, thrift and enterprise’.

Inheritance tax is an emotive issue, particularly for those living in London and the South East. It is virtually as traditional a part of August as Bank Holiday rain to see the media turn its attention to this issue, as I know from my own experience. I well remember in August 2004 when, as the Conservatives’ London spokesman, I made a few similar comments in an Evening Standard article which were then picked up by Sky News. All this was much to the horror of the Party nationally, which was trying its best to dampen down expectations of any public spending or taxation-related commitments. Sometimes even for ambitious or experienced politicians it is difficult to avoid speaking one’s mind! In my defence, my opposition to inheritance tax predates my entry to parliament and even as a backbencher while on the committee for the Finance Bill in 2002, I made clear my view that IHT is an unfair example of double taxation.

This newly-revitalised debate on inheritance tax has come about partly as a result of runaway increases in property prices. This, coupled with the stubborn refusal by the Chancellor of the Exchequer to raise IHT thresholds in line with any more than retail inflation, has brought the estates of considerably more people who would not regard themselves as wealthy, into the bracket of inheritance tax. In short, inheritance tax is a penalty on aspiration.

Unfortunately in this debate, politics is never too far away. Some of the more progressive, and electorally aware, Labour politicians realise that this issue has the potential of being dynamite. It is no coincidence that in London the most recent opinion polls suggest the swing against Labour is at its greatest, predominantly for cost of living and quality of life reasons. However, for the Conservatives to publicly support the abolition of inheritance tax (most Tory MPs would do so in private but for understandable reasons the Treasury team is reluctant to make any firm commitments on public spending this far away from an election) opens the door to some of the worse class war rhetoric. The Chancellor of the Exchequer regards this issue as an opportunity to make a blatant attack on the so-called Notting Hill set of privileged youngsters who are closely identified with some of the current leadership of the Conservative party.

The perversity of the situation is this ? the very rich have never had to pay much inheritance tax. The burden of this tax (which raised £3.3 billion last year) falls predominantly upon those of moderate income who have only been able to, over the last generation or so, buy their own homes. Inheritance tax is certainly not a charge against the privileged or super-rich. The number of estates paying IHT has almost doubled in the past decade. The truly wealthy are able to employ innovative taxation specialists to advise them on every last loophole or simply relocate to live in a more favourable tax regime. Similarly the seven year rule, which means that assets given away during the lifetime receive inheritance tax provided the donor has not died in seven years, is of little benefit to people, the majority of whose wealth is tied-up in the home in which they live. Once again, inheritance tax falls most strongly on the shoulders of hard-working, aspirant families.

Regrettably this is insufficiently understood by the general public. Above all, inheritance tax is a form of double taxation ? levied on income which has already been taxed. So keen is the Conservative party to disassociate itself from any accusation that it is protecting the interests of the rich and privileged, that it goes along with the outdated view that inheritance tax is paid only by a wealthy minority. It is precisely the aspirational group which has deserted the Conservatives over the past decade who are already finding themselves, particularly in property hotspots, running the risk of leaving estates well beyond the £285 000 IHT threshold. Even in relatively unglamorous London suburbs and the South East, £285 000 is considerably lower than the average house price. It is the most natural instinct for people, particularly when they become older, to want to pass on the fruits of their lifelong work to their loved ones. It is a disgrace that to pay an inheritance tax bill, many people will need to sell a much-cherished family home.

I hope that the Conservative party will take a braver stance in the run up to the general election. Whilst I can understand why the Shadow Chancellor is reluctant to commit the Conservatives at this stage, equally we need to face some facts. The £3.3 billion raised last year accounts for the cost of about eight working days’ spending on the National Health Service. Abolishing inheritance tax impacts the seriously rich no more than getting rid of grammar schools. Indeed highly paid tax accountants are probably the class most likely to lose out if inheritance tax was abolished as the complicated schemes they so skilfully create to protect the wealth of genuinely rich would no longer be necessary.