Inheritance tax remains unpopular. YouGov polls consistently rate inheritance tax to be one of the least popular taxes, with 59-69 per cent of the public considering them unfair. Reforms are needed that not only make economic sense – but provide a progressive interpretation of the way that the public perceives a fair society.

First introduced to affect only the very wealthy, the tax sought to rebalance and redistribute some of the wealth accumulated in property. In the first appearance of its modern form in 1987, the nil-rate band was set at £71,000, and it has since risen by 321 per cent. If the band had risen in line with the increase in house prices, the threshold would now stand at approximately £427,845 (accurate Q1 2016, Halifax data). The current £325,000 threshold for individuals suggests a significant tightening of the rules, but quickly this allowance increases when shared with a civil partner or spouse (resulting in a £750,000 allowance). New inheritance tax relief due to be phased in through to 2021 by the government, will effectively result in an inheritance threshold of £1,000,000 for a couple.

Only a small percentage of the population will face inheritance tax, with the Land Registry estimating the average United Kingdom home to cost £190,275 based on property sales (with the average London home costing £530, 368); and the Office of National Statistics providing a mix-adjusted average UK house price estimate of £284,000. In 2014, it was estimated that only five per cent of deaths were subject to inheritance tax – and yet despite the majority of people never having to face this prospect, it continues to remain deeply unpopular.

I spoke to tax specialist, Jolyon Maugham QC, about the sort of response that he thinks Labour could make:

‘I think it’s only about 5% of deaths every year that pay inheritance tax – the debate is characterised by a number of falsities – but carries with it a truth which is that people think 40% is confiscatory. If you look at the polling data, even Labour voters think that inheritance tax is unfair.’

‘Now those of us who think that taxing inherited wealth is a good thing can yell at the electorate at large that they are wrong to think what they think – but I would rather that the party finds a stance on inheritance tax that reflects people’s innate understanding of fairness, which builds popular support for a remodelled inheritance tax, which stands to turn it into a measure that makes an important contribution to the funding of public services’

What is argued here is not necessarily a concession to those who wish to argue for a reduction in taxes, but rather a reframing of the discourse around inheritance in a way that emphasises the way that people consider fair taxation (and indeed we know this to be something that people feel strongly about considering the public response to the Panama Papers). For some, the idea of people giving up almost half of their estates on their death is a narrative that is unfair. To address this, Maugham suggests that we cut the rate of inheritance tax while removing some of the loopholes that not only allow people to avoid paying their fair share, but have negative impacts on the economies they are seeking to support:

Maugham said:

“I think that this might feel much more palatable to people and we could charge inheritance tax at that rate – perhaps on property above the median house price so that people could pass their house on to their children – but we should remove many of the exemptions and reliefs that function to distort the value of many different asset classes for example, agricultural property.”

Indeed, despite the aim of agricultural relief to support families working in this sector; the relief encourages wealthy investors to store their wealth in farmland, driving up costs and pricing out those it attempts to help. Further difficulties are presented to those who hope to deal with these rising costs through farm diversification (eg. operating kennels, grazing horses, tourism), potentially restricting access to both agricultural property relief and business property relief. Such reliefs produce a result that is absolutely contrary to the economic result that we would like to see the system deliver.

Research from the Fabian Society has suggested argued however that the inheritance tax is beyond reform, and should be replaced. To deal with the transfer of assets they suggest small initial sums/gifts within a lifetime allowance would be excluded from taxation, but following this all transfers would be subject to a levy. This approach restricts the scope for planning to avoid payment of taxes, with a strong incentive for families to spread wealth widely. A similar approach is provided by Richard Murphy, in his recent ‘The Joy of Tax’, suggesting the abolition of inheritance tax along with a reform of capital gains tax – thereby taxing the accumulation of wealth regardless of its method of acquisition.

Such ideas provide a direction that we may wish to face on these policies, but may require a conception of property and taxation that goes beyond current public perception. As progressives we can continue to push forever better policy, while acknowledging the limitations placed on us by prevailing public narratives.

This raises new challenges when faced with a public that are not only sceptical with the Labour party, but have a growing distrust in political institutions (and their spending of public funds) as a whole in response to continuing revelations around politicians spurious tax arrangements and expenses. A party able to sincerely address these challenges is one that truly speaks to the public.

———————————

Greg Dash is deputy editor of Anticipations, the Young Fabian journal. He tweets @GregLabour

———————————

Photo