Reform of inheritance tax

This is the first of two articles written by James Greig, partner in the Oxford office and inheritance tax specialist, in response to the January 2020 report under this name published by the All-Party Parliamentary Group “Inheritance & Intergenerational Fairness.”

Part I .  In defence of Britain’s ‘most hated tax’.[1]

Permit me to introduce my client.  He says he is well enough known in this country that, like the BBC and QE2, he likes to be known [2] by his initials: IHT.  What he really objects to, and where he has asked for my help, is in defending him against what none other than the Financial Times branded him: “Britain’s most hated tax.”

Frankly, this is not an award he wanted to win.  It is not as though he has not had a lot of competition over the years.  Why is he so unpopular?   I admit I don’t always like IHT, but both he and I find the hatred baffling.

Firstly, almost nobody pays IHT.  The last figures show ‘fewer than 5% of deaths actually result in payment of IHT.”[3]  In other words, for every 100 people who die, 95 never pay even £1 in death duties.  ‘Love’ may be too much to expect from the 95%, but why would they have any cause to hate IHT?   Look at petrol car drivers, drinkers, smokers, gamblers and frequent flyers.  Since 100% of them are paying the tax, surely those taxes should be more unpopular.

Which leads me to the second point I want to make on IHT’s behalf.  No-one (of the 5%) is ever worse off.   The deceased never feels the pain of paying the tax, and the beneficiary (in the 5% of cases) gets to keep at least 60% of what is surely a windfall.  How many times has my client heard, “No amount of money will ever bring granny back!”

I could understand if my client was hated by HM Revenue & Customs.  IHT comes near the bottom of the class nearly every year, accounting for a paltry 1% of national revenue.  Would IHT really be missed?

Fourthly, (and speaking now personally), while I have been careful not to call IHT my friend, I am not wholly unsupportive of what he has achieved, particularly in the post war years.  Is it not redistributive taxes which have allowed me, untitled as I am, to enjoy with the rest of the public the beauty and history of places like Chatsworth House, Blenheim Palace and Mottisfont Abbey?

Finally, I must address the gravest charge against my client – that IHT is, in effect, forcing people to pay tax twice on assets which have been earned by the sweat of their brow.  For this alone, it is claimed, my client is not fit to continue.

If that is the supposed ‘knock-down’ argument, I am afraid I remain baffled.  The most valuable asset in most estates remains the family home.  I may be unusual, but I cannot see that the amount by which UK residential property prices have outstripped the increase in the nil-rate band has any direct relation to anyone’s hard work. Nor has the rise in value been taxed anywhere along the line.  If double taxation is the gripe, why should IHT be ‘the most hated tax’?   Do the majority not pay VAT, or buy a beer, or pay for a plane flight, out of their taxed employment income?

But I understand I am too late.  My client has been held guilty in the court of public opinion.  The more IHT has tried to look palatable, the worse he has appeared[4].  Protection for businesses and farmers has been construed as benefiting the already rich.   The introduction of the transferable nil rate band in 2007 staved off the inevitable – for a time.  Raising the tax threshold to £1m for home-owners with offspring won votes but did not win any friends for IHT.  Recommendations for simplification[5] have not quelled the desire for change.

With this in mind, my client is grateful to have been shown the All-Party Parliamentary Group’s report.   He asks only a chance to comment on the form his sentence will take.  That will be the subject of my next submission.

Footnotes

[1] Financial Times, 11 July 2019

[2]  Death duties have had many names in their long lifetime: Heriot, Capital Transfer Tax and Estate Duty to name a few, before becoming Inheritance Tax in 1984.   Heriot was a medieval law.  When a villein died, the lord had the right to his most valuable piece of livestock.  Hiding the best cow could be one of the earliest forms of inheritance tax evasion – see the story of Mogg, the Villein’s daughter in “Good Masters! Sweet Ladies” by Laura Amy Schlitz, Cambridge MA p. 25 for a humorous account.

[3] HMRC IHT statistics 2016-17 (the most recent year for which figures are available)

[4] See Mirrlees Report for the Institute of Fiscal Studies, 2011 for a damning list of the reasons change is necessary

[5]  See recommendations in the Office for Tax Simplification’s report,  July 2019