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