Death & Taxes

Abolish Inheritance Tax

Regular readers of this blog will know that while I have a lot of respect for farmers (it’s a hard and stressful life), I do not think that the farming industry should receive any special treatment from the government. Ideally I would like to see most agricultural subsidies phased out and all tariffs and quotas abolished and the government should be willing to ‘give away the farm’ if it means striking or enhancing trade deals with other countries.

As such, I couldn’t find myself joining many of my fellow travellers in supporting the protest by farmers in London on Tuesday. In fact, I had some sympathy for Labour in its attempts to reform Inheritance Tax by making changes to Agricultural Property Relief as our tax system should have as few exemptions and loopholes as possible.

However, I think that this has been the wrong move by Labour and has strengthened my view that the government should instead abolish Inheritance Tax.

It is the wrong move by Labour as it has needlessly antagonised the farmers and has been a deeply unpopular move with the public and so has already seen the government wasting a lot of political capital. As Aveek Bhattacharya points out, this is likely to be only Labour’s first battle with the farmers and so it has to be careful. As I mentioned above, the government should be prepared to take on Big Farmer by scrapping agricultural subsidies, tariffs, and quotas while also lifting the ban on chlorinated chicken and hormone treated beef. This will be incredibly unpopular and will see an unholy alliance of the Guardian, the Mail, Jermy Clarkson, Jamie Oliver, the NFU, the Liberal Democrats, and probably the Tory Party join forces in order to oppose it. The government needs to pick its battles wisely and so this is not the hill to die on.

More broadly, there are real problems with Inheritance Tax and so it should be scrapped. That being said, I don’t go in for the whole ‘it’s double taxation so it’s wrong’ argument. Lots of things are taxed twice but that doesn’t mean they should be exempt from tax. Instead, there are a number of actual reasons why Inheritance Tax should probably be abolished.

First, it is a deeply cruel tax. It hits people at a time when they are grieving the loss of a loved one. Bereavement is obviously a very difficult time for most people and can actually involve a lot of work and stress. While friends and family are busy sending flowers and condolence cards, HMRC sends a tax bill. I think sometimes we are a bit too relaxed about the State using its monopoly on violence in order to extract money from its citizens and it does strike me as being even worse to do this to target the bereaved.

Second, it does go against the strong instinct many people have to leave an inheritance for their families. This may seem trivial but it is actually important. We should want people to be motivated (for whatever reason) to work hard and be productive in order to generate wealth, create jobs, grow the economy, and pay other forms of tax in order to fund essential public services. IHT – like all taxes – dampens some of that motivation if people know that at least some of the money is going to the Treasury rather than to their loved ones.

Third, it distorts economic activity. It incentivises people to sell or dispose of some forms of assets earlier than they otherwise would have done and to purchase other forms of assets in order to avoid IHT. The government should encourage people to use their money in the most productive way possible but IHT acts as a strong disincentive to do this.

Fourth, the cost associated with IHT outweighs the benefits. In terms of compliance, households have to spend significant sums on solicitors and financial advisers to ensure that they either pay the correct amount or to avoid paying it. This is money which again could be spent in other more productive and beneficial ways. Moreover, there is an added burden on taxpayers who see their taxes being spent by officials at HMRC ensuring that the correct amount is paid by estates. IHT brings in relatively little in terms of revenue (approximately £7 billion each year) and so it is difficult to argue that it is worth it.

Finally, IHT does practically nothing to tackle inequality or boost social mobility. It is often argued that levying IHT is only fair as it only impacts the wealthiest people in the country and can help to levy the playing field so that people roughly have the same start in life. While it is true that it obviously does predominantly impact wealthier people it really makes no difference to inequality. The truly wealthy can avoid paying it all together as they can afford financial advisers and solicitors and, as the average age at which someone receives their inheritance keeps increasing, the wealthy would already have been able to give their children every advantage long before they receive their inheritance. If the government is serious about tackling inequality then it would make tackling childhood poverty a key priority so that every child can have at least a decent start in life (scrapping the two child limit would be a good place to start). It should also liberalise the planning system so that more homes can be built. Not only would this help to tackle the cost of living crisis by making housing much more affordable, it would also reduce inequality as housing would be less valuable as an asset.

So, there we have it. I wouldn’t prioritise scrapping Inheritance Tax as there are far more damaging taxes on the books which should be abolished first and there are also other taxes which desperately need to be reformed. However, Inheritance Tax is cruel, distortionary, and does nothing for social mobility so it should be scrapped.

Thanks as ever for reading!