David Cameron has raised the possibility that the Conservative party, if it holds an overall majority in the next parliament, would increase the threshold for inheritance tax to £1m. This is likely to be a first step to its eventual abolition, because with such a high threshold so few estates would pay it that the administrative costs would make its retention not worthwhile. Meanwhile, the ‘super rich’ would continue to avoid paying it.
It is by no means certain – given the Conservatives have also promised to turn the budget deficit into a surplus by the end of the parliament and they are already planning eye-watering cuts to spending by government departments – that there will be money available for tax cuts in the next parliament.
As George Eaton has pointed out, the current plans for inheritance tax illustrate the trade-off perfectly. The inheritance tax threshold is to be frozen at £329,000 from 2015-16 in order to generate the funding needed for the coalition’s plans to cap the cost of elderly care at £75,000. If the threshold was increased to £1m, either the cap would have to be increased, forcing more old people to spend more on their care, or alternative funding would have to be found to keep the cap at £75,000.
If there is money for reducing taxes in the next parliament, it would be far better spent on cutting them for low and middle income families, rather than for the wealthy families. And it would be better spent on cutting taxes on earned income than on cutting taxes on unearned wealth.
However, the reaction to David Cameron’s suggestion has illustrated once again that inheritance tax is immensely unpopular, even though it is paid on only six per cent of estates.
The progressive response, therefore, should not be to argue for the retention of the current threshold, but rather to propose that inheritance tax should be abolished and replaced with a new tax on lifetime gifts to individuals, including, but not restricted to, from the estates of the deceased. This would be a progressive capital receipts tax on all cash and non-cash gifts received, above a certain tax-free threshold, during a person’s lifetime.
IPPR has in the past proposed such a capital receipts tax. We suggested that lifetime gifts over £150,000 (excluding those between married or civil partnered couples) should be taxed on a progressive scale, starting at 20 per cent and rising to 40 per cent once a person had received £450,000.
A capital receipts tax would be much harder for the very wealthy to avoid by disposing of some of their assets during their lifetime. It would help to reduce wealth inequalities in the UK. And it would promote a wider distribution of wealth by creating an incentive for greater disbursement of estates so as to limit beneficiaries’ tax bills.
—————————————————————————————
Tony Dolphin is a senior economist and associate director for economic policy at IPPR
—————————————————————————————
Photo: Images Money
Labour needs to face the need to tax wealth hard or accept an inevitable drift of most wealth into fewer and fewer hands. It also seems clear now that when you have a lot of money you can afford to pay people to hide it. Private wealth probably does not get invested as effectively for the public good as that held collectively, say by insurance companies. That is why the changes to pension arrangements hold many dangers for the future of our national infrastructure. Could we not just abolish tax relief on all pension savings?
We need to be able to tax wealth per se, wherever it is within the jurisdiction of the UK. The rich can afford to pay people to help them avoid tax because their tax affairs are private, except to the HMRC, who have had a lax approach to the pursuit of tax avoidance in the past. If everyone earning over £100,000 a year had to publish their tax return, with suitable codes to prevent any loss of commercial interest, there would be less tax avoidance and more tax revenue. I have personal experience of one tax expert who earned over £90,000 a year and paid tax on £40,000. When I questioned this with a solicitor as to how £50,000 could be claimed against allowances he said this was a normal proportion.
Sign the campaign in support of raising the threshold with a view to abolition of Inheritance Tax at https://www.causes.com/campaigns/89438-raise-the-threshold-of-inheritance-tax