Inheritance tax only makes the rich richer

Article by John Blundell in The Business

"ALL government actions create unintended effects." I offer this proposition as Blundell's Law: "All political innovations achieve the opposite of their official purpose." I claim this is a universal law of bureaucracy and legislation. Last week's discovery that many GP practices in the UK were stopping patients making appointments earlier than 48 hours ahead to fulfil bogus National Health Service (NHS) targets is a perfect example of my law. My greater example of the moment is inheritance tax.

The MPs who voted for this fiscal impertinence supposed they were creaming off the very wealthy and leaving those of modest or middling incomes untouched. The Treasury enunciates the same one dimensional falsehood. Their stated aim is to harvest from those with "unearned income". Most commentators concur in this naive assessment. It is easy to follow the thought processes. It is little more than expropriation sanctified by references to "equality" or "social justice".

Yet what happens when the Treasury says all family assets above the threshold of £275,000 (E404,000, $525,000) will be taxed at 40%? The truly affluent take evading, sorry avoiding, advice from lawyers and accountants. Inheritance tax makes the very wealthy wealthier. Their assets are hidden and protected where the benign effects of compound interest accrue. The cadres of expertise also grow and prosper. There are some fairly straightforward strategies to avoid inheritance tax hitting you and your family. Perhaps the most obvious one is to be reconciled to your mortality and to consign assets seven years before you expire. The sophisticated tax lawyers and accountants contrive ever more elaborate wheezes to cut the liability. The Treasury calls these "loopholes" and is forever trying to close them. It is worth adding that trusts are themselves derived from ingenious efforts to avoid the Tudor Crown's seizure of the assets of its dead subjects. King Henry VIII offered no humbug about redistributing the cash. He wanted it for his military adventures and other state follies.

According to the government's own figures on inheritance tax the average estate being levied is £400,000. Is this really the mark of a wealthy man or woman? We can all see it is no more than a middle market home supplemented by a few life insurance policies. The words and the reality have diverged. It might be better termed the "Crush the Middle Classes Tax" or perhaps even more accurately "Creaming from the Elderly". In the majority of cases those incurring this tax have taken no professional advice to deflect the death penalty on their assets. It seems many have no perception of their status as wealthy by the criteria of the Inland Revenue as they are merely sitting on their family home from which children and spouse have gone.

Perhaps I am not alone in being baffled at the timidity of the Conservatives in not scrapping this iniquitous tax. They had almost two decades in power and did nothing but creep the threshold up with inflation - that is to say preserve it. In Opposition they could have offered the bold and simple promise to abandon a tax that is repugnant and feeble as a source of revenue. Former Tory prime minister Edward Heath did hint at abolishing this levy before winning power in 1970 but the idea was not applied in office. It is worth noting the threshold for the tax then was £12,500.

At a superficial level inheritance tax hints at the breaking up of large accumulations of wealth. It achieves precisely the opposite unless the rich person is entirely negligent about his affairs. Inheritance taxes pretend to tax the person expiring. In reality they dent the heirs of those of modest means who are usually oblivious of the tax burden they will inherit. The Inland Revenue offers a leaflet that guides the wealthy in how to cut their tax prospects. It is called "Reliefs". They exclude working farmers and landowners. Providing they have owned the fields or the forests for two years the exemption is total. This almost self-defines the wealthy. The ownership of agricultural land or woodland also attracts generous subsidies so we can see the state in mid hypocrisy - enhancing the wealth of those proving their current rural assets. Equally, ownership of corporate assets are excused inheritance taxes if they are of more than two year's endurance. The Revenue says this is to stop the breaking up of family businesses. So, the tax remains targeted on the helpless and the suburban. If you are a well-advised aristocrat with a few hundred thousand acres the system is positively generous. If you are a widow in Guildford with only one dormant asset, your home, you will be punished - punished at 40%.

I am optimistic that the east European innovation of uniform but low taxes - the flat tax - will sweep westwards and inheritance taxes will evaporate within a generation. We have a real phenomenon of tax competition within the European Union member nations now. The present estate duty is derived from 1894 when the state's two priorities were building more battleships and annexing more imperial land. Taxes have their own life. The contingencies that created them evaporate away but the carrion role of the Revenue continues.

Without the superstructure of this tax it is even possible to argue the third or fourth generations would have squandered their inheritances in unlucky investments or foolish luxuries. Left to do with their property as they chose many would end up donating far more to the Treasury than they do under a system that invites and rewards avoidance.

Republican campaigners in the US, led by William Beach of the Heritage Foundation and Grover Norquist of Americans for Tax Reform seem to have animated their "Death Tax" into a topic of popular outrage. They say their new name for it is more vivid than inheritance tax.

It is a truth of all taxation. High taxes invite clever avoidance so they accrue little revenue. Low taxes are not worth evading so they harvest more for the Treasury. Inheritance Tax sounds like a device to levy from expiring dukes and billionaires. The reality is far more cruel.

John Blundell is director general of the Institute of Economic Affairs

If you are interested in taxation issues you might wish to check
Euthanasia for Death Duties by Dr Barry Bracewell-Milnes, visit
TaxPayers' Alliance who fight the burden of high taxes in the UK.