The famous phrase that there is nothing certain in this life except death and taxes is usually attributed to Benjamin Franklin. But even that isnt certain these days as there are examples of the phrase being used which predate Franklins letter to JeanBaptiste Leroy. Just goes to show that recycling of political jokes is nothing new!
Which leads me onto the ultimate tax and death being Inheritance Tax (IHT). Of course it isnt actually a tax restricted to death although that is where most people will come across it. The Office of Budget Responsibility (OBR) is forecasting record receipts from IHT of £5.3bn in 2019/20. It was therefore an opportune moment for our friends at the Office of Tax Simplification (OTS) to reopen the debate of whether it is correctly targeted and is it ripe for change.
The OTS mission is not of course to decide whether a tax is fair; they should only be concerned about whether it is too complex. The clue is in their name after all! However, they have chosen to look at the scope of Business Property and Agricultural Property Relief (the main exemptions for business and land owners) and invited comments on whether the relief should be restricted. In particular, they wonder whether passive investment in stocks and shares or passive ownership of farmland should offer the same exemptions as those available in qualifying circumstances to entrepreneurial business owners and active farmers. By opening the debate, however, it has begun to focus politicians minds to the purpose of IHT. If it is a tool to reduce wealth inequality, it doesnt really seem to be working. It is a blunt tool and proportionally hits more modest wealth, the owners of which cannot realistically access the various reliefs available. If it is a tax raiser, than the latest OBR forecast shows that it is working to some extent. But is it fair? For many hit by IHT they see it as the Government taxing again already taxed income. At the extreme, someone earning sufficient to pay 45% income tax is left with £55 for every £100 earned. If this is then subject to IHT at 40% their beneficiaries receive only £33; an overall tax take for the Government of 67%. As with all things in life, whether you feel IHT is fair and correctly targeted very much depends on where you stand both socially and politically. As a society there is little doubt that wealth inequality is an issue and needs to be addressed. But how is that best achieved? There are increasing calls in some quarters for the introduction of an annual wealth tax. Annual wealth taxes used to be popular with many of our European neighbours, but the general feeling was that they were unpopular, difficult and costly to administer and raised very little. Therefore, one by one countries have abolished them in favour of death or property-based taxes. Experience therefore shows that this isnt the answer. So maybe our current system of IHT, although not perfect, is the best we are going to get. We have seen significant changes to the UK property landscape over the last few years, so it is just possible that what was seen as an attempt to cool the UK property market is indirectly addressing wealth inequality. Was this actually part of the plan? The debate is unlikely to go away but it would be good if the OTS concentrated on simplification rather than policy. My first suggestion would be to increase the nil rate band which has been frozen at £325,000 for far too long. If this moved to, say, £500,000 we could at the same time remove the ridiculously complex additional exemption available in qualifying circumstances for your home. Simple really. And if it needed to be funded how about restricting the nil rate band for estates over a certain size. Sounds like I am trying to make it complex again but its worth a thought!
