Inheritance tax to be increased

No, not really, but we felt it was high time someone said something different.

The reported polling shifts of the last few days have highlighted how easily led some people can be. For people to respond so favourably to a proposal for a huge hike in the starting threshold for one of the few progressive taxes on the UK statute book, and on the grounds that it is an unfair tax, must have caused some to question whether universal suffrage is such a good thing after all.

No one likes paying tax and especially to governments, of whatever stripe, who seem unable to do anything but waste the money they wring from its citizens. But, taxes will be charged and collected nevertheless. So, it is then only a case of what the tax is charged on, and to what degree ?

Estate or inheritance taxes have their roots in longstanding political philosophies which hold that it is best for a society, as a whole, that wealth circulates in the economy. Ask the French what happens if wealth is inalienable and they will tell you that you get a revolution.

Estate taxes are not absolutely necessary to achieve this objective but do assist in its attainment by redistributing wealth from the richer person to the poorer person. This is done by taking a slice of the richer person's wealth (when they are dead and have no use for their money anymore) and adding it to the government's coffers, thereby allowing the government to collect less tax from the poorer person who is still alive, e.g., on their wages, and at a time when they can still benefit and have the opportunity to make something of it. If the poorer person becomes a richer person, they subsequently pay their bit when they die, and so on. If the poorer person remains a poorer person, they pay less, or nothing whatsoever, on death.

Remove the tax on death, and you not only restrict the ability for wealth to be put to best use in the economy, but the tax revenue still has to be collected from somewhere; with that somewhere being the more regressive of taxes; income tax, national insurance, VAT, council tax.

Logically, therefore, the person who wants the best for their children and grandchildren, but has wealth in the £300,000 to £1M bracket, should not be seeking to pay no inheritance tax but should, rather, be comforted with the knowledge that those worth £1M, £10M or £100M are paying more.

By way of illustration, the individual who wants their children to inherit the value of a £400,000 estate (this being the aggregate of recently reported averages for house prices and other savings) might be content to settle for their estate being subjected to £40,000 IHT (an effective rate of 10%) if only they stop to remind themselves that an the individual with an estate worth £4M has his estate subjected to £1.48 million IHT (an effective rate of 37%). The absolute gap between the wealth of the parents is reduced for their respective children, grandchildren etc.

The current, low grade political debate is, perhaps, nothing more than the inevitable consequence of certain policy shifts in the 1980s; the reduction in the social housing stock and the weighting of the tax burden onto earnings, with the removal of the upper earnings cap for secondary Class 1 NIC and the abolition of the Investment Income Surcharge, both in 1985.

With this having fostered a regime of self interest and an obsession with passive investment, i.e., residential housing, and an ever increasing divide between the have every-things and the have sod-alls, we wonder whether the time is nigh not to be talking about reducing the burden of inheritance tax but, rather, to be taking about significantly increasing it.

In this regard, a few suggestions for discussion could be as follows:

• The abolition of the PET regime, thereby removing the FA 2006 disincentive to the use of trusts for prudent wealth management (and saving too many tax advisers from the private agony of seeing their favourite deceased client's feckless children blow their inheritance !).

• The introduction of graduated rates of IHT, more akin to those of the capital transfer tax era, but starting at an estate level of say £1M or £2M plus.

• A reduction in the lifetime rates from one-half to one-quarter of the death time rates, thereby encouraging the early giving of wealth to children and grandchildren who could put that wealth to better economic use than the older generations.

• The re-writing of the business property relief code to encourage investment into privately owned, close trading companies.

• The introduction of a brand new exemption for gifts used solely towards academic and vocational education costs.