Rufus's Law

ON WEEKEND MORNINGS, I take Rufus for a run down on the local common and usually stop by the newsagents on the way to pick up my newspaper. On Saturday, 3 February my eye was caught by the Daily Express headline 'Thousands say: scrap death tax', so naturally purchased a copy. Rufus wasn't that interested — by modern standards his possessions are fairly meagre; a couple of dog leads, some bowls and his bed; inheritance tax does not therefore figure highly amongst his concerns, unlike the 'thousands and thousands' of Daily Express readers who have signed up to the newspaper's campaign for the abolition of inheritance tax. So while he was off chasing the rabbits, I was left to ponder the similarities between dogs and humans and whether he is right in his theory that we are both pack animals. There is nothing Rufus likes better than to watch nature programmes, especially where a pack of wolves chase down a caribou in the wilds of Canada; you can almost feel the ancestral memories coming back to him. He's usually a bit peckish once the programme is over! Having watched a few episodes of the last 'Celebrity Big Brother' and seeing the shop that sold out of a trendy new shopping bag in a couple of hours the other day, you have to start wondering if he has a point. Someone perceived for some reason to be a leader can influence the followers in the pack. And let's be clear about it; it is much less stressful to be a follower rather than the 'alpha' male or female in a pack. They have all the worry of finding prey, a safe place to sleep and the right shoulder bag; all the rest have a reasonably easy time of it — they don't have to think about anything, just run with the pack, hunt with the pack, stay with the pack; there's safety in numbers.

First, catch your caribou

So, my putative book on dog/human pack behaviour has gained a new chapter courtesy of the 'scrap inheritance tax' campaign. Let's face it, anyone who is asked whether they would like to keep a bigger part of their estate or their caribou is likely to vote in favour of it and at the last count over 120,000 of the taxpaying public felt likewise and had signed up to the Daily Express petition on the Prime Minister's website to abolish this 'immoral' tax (http://snipurl.com/scrapiht) as compared to the 140 who had signed up to 'Keep inheritance tax'). The petition argues that 'By raising a 40% levy on earned assets, it is also effectively double taxation. It frequently piles financial misery and distress on families already suffering the pain of bereavement; that is nothing less than grave robbery'. Two questions occur to me with regards to the campaign to abolish inheritance tax.
First, the fundamental problem with abolishing any tax is what will we replace it with? Several proponents of abolition have advised me that the tax loss should be made up from savings elsewhere. I am never entirely convinced by this suggestion and recalled my schoolday physics lessons and the first law of thermodynamics, 'energy can be neither created nor destroyed, merely changed from one form into another'. I started to wonder if there is not a tax equivalent; not wishing to grab posterity for myself, perhaps we should call it Rufus's law:

'Tax can neither be created nor destroyed, merely changed from one form into another.'

Gordon Brown himself appears to subscribe to Rufus's Law. As pointed out by Mike Truman in 'No tonic' (Taxation, 22 March 2007, page S1), the tax giveaways in the 2007 Budget seem to miraculously mirror the tax hikes. Now, HMRC's website indicates that receipts from inheritance tax were £3,259 million in 2005-06. On the basis of Rufus's Law, one possible alternative that occurs to me would be to impose VAT on newspapers, etc. HMRC advise me that they estimate that the cost of the zero-rate exemption — something which does not apply in many European countries — is approximately £1,650 million. Coincidentally, this means that we are already half-way to making up the shortfall, but I am not sure how this suggestion would go down with national newspapers!
The second question in my mind is who are these petitioners?

Mrs P and IHT

The Daily Express of Monday, 5 February, continued its rather emotive 'unstoppable crusade on inheritance tax'. The newspaper explained that 'Margaret Parkinson paid out £10,000 in inheritance tax — the same amount her late father received in compensation for being a Japanese prisoner in the Second World War'.
Mrs Parkinson ('a cancer sufferer') and her husband were 'hit with the levy' when her father died, leaving them his £285,000 flat. Mrs Parkinson is 'furious at being penalised' because of the hike in south-east property prices. Her father was too old to enjoy the wartime compensation payment and wanted his family to spend it for him. Mrs Parkinson explained (seemingly ignoring the fact that her own estate had recently increased by some £250,000) that 'we've been denied that privilege now'. I can only wonder whether someone should have explained to Mrs Parkinson that she could either pay the inheritance tax liability by ten annual instalments or by selling the property (probably free of capital gains tax bearing in mind the uplift on death) leaving her and her husband with £275,000, having suffered an effective tax rate of less than 4%. Bearing in mind that he was 85 when he died, and that they would benefit under his will, a further alternative might have been for Mrs Parkinson to have taken out insurance cover on her father's life some years ago to pay the potential liability.
If Mrs Parkinson is a typical reader, it does seem an extraordinary amount of fuss for what is a 4% tax. Imagine the coverage if a paper realised that there were people out there paying 40% tax and if they knew that it was 40% tax on money they actually had to go out to get by virtue of their own 'hard work' and not someone else's!

Where's the wealth?

It did start to make me wonder why it is the Daily Express that is running this campaign. The Newspaper Marketing Agency's demographic profile of the paper's readership shows that 37% of its readers are over 65 years old, so this could be a reason. However, the demographics also show that 73% are in the C1, C2, D or E social status grades (i.e. supervisory, skilled manual, semi and unskilled manual and unemployed workers). I realise that it might be a little simplistic to assume that wealth is distributed throughout the population on exactly the same basis, but on the assumption that these social grades comprise about 80% of families and that inheritance tax is currently — according to the Chancellor's 2007 Budget speech — only estimated to affect 6% of estates who I would guess are more likely to be in the A and B classifications, it would seem that relatively few of the paper's readership should currently have a major inheritance tax problem.
It is my understanding that the apparent dichotomy between the level of concern and the apparent wealth of the paper's readership is explained by the readers' aspirations to be middle class. Furthermore, readers' experiences were that this was 'an unpleasant tax to pay'. They are dealing with the death of (say) a parent, there was a lot of detail to be obtained and forms to be filled in and the tax must then paid within six months of the death.
While I would not deny that a death in the family is a distressing and stressful experience and that obtaining information and filling in forms is rarely anyone's favourite occupation, let us not forget that what the abolitionists want to do is to obtain the benefits of the deceased's estate without the payment of tax. 'Obtaining information and filling in forms' will still be necessary to ascertain the estate to be distributed and for Probate to be obtained. Calculating the inheritance tax liability is comparatively simple once those legal requirements have been complied with and this will often be done by a solicitor in any event.

Who really benefits?

Whenever I see a campaign, I always have to ask myself, like Cicero, 'cui bono' — 'who benefits'. I do recall many years ago the arguments regarding investment income surcharge. This was a terrible tax eating away unfairly at the savings of those hardworking people (usually widows, I seem to recall from the radio and television interviews of the time) who had, say, built up a successful business over their working life, reached retirement age, sold it and were now living on the resultant investment income on which they were having to pay this iniquitous tax. Try as I might, I couldn't seem to find hordes of these people. Mostly, their investment income was covered by the, at the time reasonably generous, exemption for the first £7,100 of income. The widows supposedly being reduced to penury could easily have been catered for by, say, doubling the annual exemption to £15,000 (bear in mind that we are talking about 1983 here). It occurred to me that the main beneficiaries of the campaign to abolish this tax were those living on substantial amounts of inherited wealth, although, strangely, there didn't seem to be much of a mention of the amounts of tax that these people might save.
I keep getting this strange sense of déjà vu with the inheritance tax abolition campaign. If we are really concerned that the struggling middle classes are being drawn into the inheritance tax net because the mesh is too small, then why not suggest that the holes in the net should simply be made a bit bigger to let a few more swim through? Mr Brown announced this week that the nil-rate band would increase to £350,000 from 2010; however, while this might help the likes of Mrs Margaret Parkinson, I somehow doubt that this is going to satisfy the abolitionists.
However, let us imagine instead that you are in the millionaire league or even a multi-millionaire. You have probably taken steps to mitigate your corporation tax and capital gains tax liabilities; perhaps the shares are owned by an offshore trust. Unfortunately, you were born and brought up in the UK and are domiciled here. It is doubly annoying when you look around at your fellow multi-millionaires who are perhaps domiciled in obscure islands in the English Channel or Eastern Europe.
For the wealthy and the very wealthy, the abolition of inheritance tax would certainly solve many tax planning problems in a way that increases in the nil-rate band never will.

Striking a balance

Now I am not suggesting that we should discourage the accumulation of wealth; after all it is good that people have ambition to generate and create wealth, but surely there must be a balance to be achieved between the genetic desire to look after our young and the desire to create a fairer society, or at the very least prevent it from becoming even more 'unfair'.
There is an interesting chart on the National Statistics website (http://snipurl.com/nationalwealth), see Table 1 below. Despite the fact that we might think that we live in an increasingly egalitarian society, the reality is somewhat different. The most recent figures show that the wealthiest 1% own 20% of the wealth and the wealthiest 50% own 93% — figures that have remained remarkably static over the past 30 years. In fact, when one takes the value of dwellings out of the equation, the figures are even more extreme, with the wealthiest 1% and 50% now owning 34% and 99% respectively. Perhaps this is why people are so enervated by house prices, as the rising value of property is the one way in which they can hope to move a rung or two up the social and wealth scale or at least prevent the pack leaders running even further ahead. The 'genetic' element takes over and having got a slice of the caribou or house, it's only natural that we want to keep it and if possible pass it on to our progeny.
What worries me a little about the current campaign for abolition, especially when seen in the light of these statistics, is when I hear — as I did on the news the other day — a young woman explaining the criminal lifestyle of herself and her boyfriend as a career choice to achieve their ambitions and be able to own the things that they see others having. I do start to wonder where the pack behaviour will stop.

Run with the wolf-pack

So where does all this leave us? From the petition, it looks as though the wolf-pack is up and running online. But before we all join in, perhaps, for a moment or two, we could think that there might be an alternative where it's not always the caribou that are giving and the wolves that are taking. Alternatively, what's the point of that; we'd just be denying our true genetic nature, wouldn't we? Stop thinking, open those jaws and chomp down hard. That's what Rufus would do I'm sure, and he usually knows best!                     

Table 1. Distribution of wealth

Issue: 4101 / Categories: Comment & Analysis , Inheritance Tax