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Key points * Inheritance tax is akin to grave robbery. * If abolished, does inheritance tax have to be replaced? * The ability to obtain multiple use of the nil-rate band. * Rising property prices will increase the numbers affected by inheritance tax. * The economic benefits of abolition.
WHEN I READ 'Rufus's law', by Richard Curtis (Taxation, 29 March 2007, page 345), I looked at my goldfish swimming in his little round bowl with Mrs Goldie and wondered what he would make of the Daily Express headline on scrapping inheritance tax. Unlike Rufus, who can chase caribou in Canada providing he remembers his dog passport, Goldie cannot really go anywhere and only has his little bowl to look out of at the never changing scenery! What would he think if he and Mrs Goldie passed on and left their only real possession, the round bowl, to the little Goldies and the bowl had to be sold to pay taxes? I showed him Rufus's law through the glass of the bowl and he was, like me, horrified at what he saw and started to blow bubbles furiously, but fortunately after ten seconds he had forgotten and was back to his calm self, swimming anti-clockwise around his little home. I am sure that Goldie would support The Daily Express in its campaign like the majority of the readership. Rufus obviously forgets the day he went to doggy training school and, as a new dog, made friends with Jack the Russell whom the other dogs all hated. Rufus initially could not understand why they hated his new friend, but after Jack had nipped his long legs many times he realised that the majority were right all along … Jack was a pain in the heels! Clearly, if 120,000 Express readers support the idea of abolishing inheritance tax they cannot all be wrong, as Rufus learnt in the dog training school all those years ago, but obviously has conveniently forgotten.
First, catch your worm
The Daily Express 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'. Slightly emotive, but nonetheless accurate in many cases. On a death there are a number of forms to fill out and this is usually done by an acting solicitor who takes the emotional burden away from the families concerned. Most families see little of the paperwork at this difficult time and are protected to a great extent from day to day financial reminders of the deceased's demise. But then, when it is all over, they get a tax bill from HMRC which in many cases means they have to sell the family home they have inherited. Not only that, the family may have to find additional funding in the form of a loan (with interest) to pay the tax before the property can be sold. I think the analogy with grave robbing is actually quite generous! It's akin to the old days of Burke and Hare; but remember, even if the body was discovered on the anatomist's mortuary slab, the bodysnatchers could not be charged with any crime as a body was not property! I am starting to become emotive now and must address the points raised in the original article with a necessary detachment.
Is there a need to replace IHT?
Richard in his article suggests that if inheritance tax is abolished 'what will we replace it with?' Well I would say that many countries such as Hong Kong, Australia and New Zealand that have no estate duty taxes seem to find that the lack of such a tax has not hindered the economy or provision of services and infrastructure to their burgeoning economies. Hong Kong has more billionaires per percentage of population (according to Forbes Magazine, 18 billionaires per population of seven million) than any other country and chooses not to impose estate duty levies. Why is this? Because the powers that be know it would be counter productive in terms of inward investment and attracting high net worth individuals to remain there. The obverse of this is now being mirrored in the UK with emigration from these shores to Australia increasing as reported in The Times on 19 April. Those individuals now leaving will not be able to escape their inheritance tax burden unless they successfully change their domicile, but it does mean a lot of wealth is leaving the country and this is likely to continue. If inheritance tax was abolished, those high net worth non-UK individuals who are reticent about staying in the UK longer than seventeen years could make a greater financial commitment to the UK which in turn would boost the economy and the Treasury would receive, I believe, far more than the £3.2 billion lost in inheritance tax revenues. Those UK individuals leaving these shores would no longer be forced to look for loopholes and offshore havens to secrete their wealth. So the answer in pure economic terms is that one does not have to replace an abolished tax with a replacement, or have Hong Kong got it all wrong? I think not!
Mrs Goldie and IHT
The second point in the article mentions the eponymous Mrs Parkinson who inherits her father's flat worth £285,000 on which inheritance tax has to be paid and she is 'furious at being penalised' because of the hike in south-east property prices. Richard quite rightly states that after the nil rate band has been taken into account the actual effective rate is a mere 4%! I warmed to his suggestion of taking out insurance to pay the ultimate inheritance tax bill. However in most cases, because of age and life expectancy, the premiums would have been potentially exorbitant and in this particular case where would he, a pensioner, find the annual premiums?
Some would say that this was not the best case study for the Daily Express to report. I disagree; it is typical and defines the inequity in this tax. There are many cases like Mrs P who inherit a property which has a paper valuation on which tax is imposed notwithstanding IHTA 1984, s 191. But these types of estate are at a disadvantage because, in contrast to estates of higher value with liquid funds, they are unable to utilise the nil rate band every seven years to pass on assets to the children entirely free of inheritance tax. Instead they get one nil rate band and pay tax on the balance at an iniquitous rate of 40%. In this case you can look at the problem from inside the goldfish bowl or from outside and it looks totally different. Richard looking into my goldfish bowl sees only a 4% rate of tax, but Mrs Goldie looking out (Mr Goldie having expired and been flushed away quietly one night so as not to upset the children) does not. Similarly Mrs Parkinson does not see her nil rate band as a particular individual benefit as everyone gets it (and some others benefit from it more than once!). What she and many others see is tax at 40% on the balance, however small, and this is the whole point. It's similar to Rufus, the dog with everything including mange, possibly, racing against a Dachshund and Richard proudly saying it was a fair race because they started from the same spot. I won't bang on about tapered relief or a higher nil rate band because at the end of the day there should be no inheritance tax and therefore no such inequities.
Demographic profiling
The Daily Express readership in Richard's article seems to be a fairly broad representation of the UK populus and is probably more typical than any other daily paper conducting a representative poll on such a matter. I would think that, say, the Financial Times would have A and B classification almost entirely through its readership and the Daily Sport might be D and E both of which would be unrepresentative. A majority of the Daily Express readership may not currently have an inheritance tax problem, but with property prices rising as they are, the problem won't stay away too much longer. Soon they will be inheriting properties that are increasing at double digit percentages in value and this increase will be added to their increasing double digit property values, swelling the estate to take it well into the 40% band. The readership cannot be criticised for being perceptive of the looming liabilities likely to be faced. Why should their beneficiaries not pay inheritance tax on their property value at the end of the day especially as they have lived in the property free from capital gains tax? The answer is simple … one man's profit is another man's loss. As property prices increase, the purchasers of those properties have to take out bigger and bigger loans to fund the purchase. The loan which will invariably be a repayment loan has interest to be paid back and this interest is being funded out of income which could have been spent on other things that attract VAT.
If I was in the Treasury I would rather have 17.5% now rather than the hope of 40% in goodness knows how many years' time. The Daily Express readership with its fixation on property price increases has latently showed a fundamental business flaw with the logic of imposing inheritance tax in an increasing property market. A lot of Hong Kong's wealth is based on real estate value increases, but you will not see estate taxes imposed because they would rather have jam today rather than the expectation of honey tomorrow … but then their business acumen has never been questioned! I return to Richard's article and his quotation from Cicero — 'who benefits'. Well, in the circumstances of inheritance tax, Oscar Wilde's quotation written on his wallpaper would be more appropriate 'It is killing me, one of us has to go'.
Epilogue
All old American TV series included the 'epilogue' at the end which rounded up the episode. Incidentally, the US does have estate taxes, but I won't mention the state of their economy. My epilogue is that the abolitionists are looking from the fish bowl outside and can see the inequity of inheritance tax and its manipulation of market forces whereas those non-abolitionists are looking into the bowl and don't even consider that implication. The law of physics says that light is refracted when it hits water, so fish can see you coming before you get to the bank of the river. I think it is the same here; we, those of us in the bowl, will never see eye to eye with those outside the bowl. So inheritance tax will probably stay and the words of Oscar Wilde on his death bed — 'I am dying, as I have lived, beyond my means' — will apply to most of us in the end.
Jon Golding of LexisNexis Butterworths is author of Tolley's Inheritance Tax 2006-07.
