This essay will consider this question from a legal, economic and philosophical perspective. IHTs ability to satisfy its legal duty, coupled with its success as a law that is not meant to be avoided is questionable. Economically, issues arise over the effectiveness of the tax in redistributing wealth and whether it imposes unnecessary burdens upon the populous. Philosophically, objections are raised over the ability for the state to control what you do with your hard-earned wealth. This essay will explore these points, coupled with looking IHT systems in other countries, to conclusively answer the question of whether IHT should be abolished in the UK.
A formal definition alongside a brief background of the tax is paramount to construct a proper understanding of ‘Britain’s far from popular tax’ (Lee, 2007). IHT is a tax placed upon your death estate once you die. Your death estate is your property, savings and other assets after all debts and funeral expenses have been deducted. Every individual is entitled to a tax-free inheritance of £325,000 (entitled to £475,000 if leaving an estate). This is known as the nil-rate band. Anything above this nil-rate band is taxed at a 40% rate. In the case of couples, A and B for example, it is a little different. If A dies, all of their estate is passed onto B without any taxation. Since B now has the wealth of 2 people to give, their nil-rate band goes up to £650,000 (entitled to £975,000 if leaving an estate). However, not all items are taxed, and Potentially Exempt Transfers (P.E. T’s) and trusts are available. In the case of a P.E.T, if you give a house away to a descendant more than 7 years prior to your death, you are not subject to pay any IHT on that house once you die, as it will not be considered as part of your death estate. Trusts operate in a similar way. These are mechanisms that wealth can be placed into any time before your death, and so, are not taxed, as they are also not considered to be a part of your death estate. The point of the tax, introduced in 1986 as CGT, is to encourage the equal-redistribution of wealth in the UK. This is the tax in theory. Although, whilst IHT may theoretically seem to be fair and rational, in practice serious legal, economic and philosophical questions are raised.
A legal analysis/discussion of IHT:
This section will analyse whether IHT is effective as a law that is not meant to be avoided by those who should pay it, and whether it meets its legal purpose. These two questions are key in forming this analysis and properly discussing whether IHT is ‘legally virtuous’. This section will then conclude through offering an opinion on whether IHT should be abolished from a legal standpoint.
Inheritance tax is said to follow a strict set of rules that make the tax unavoidable by those who should pay it. Although it is submitted that IHT seems to fail in making sure that it is not avoided. IHTs strictness once caught within motivates careful estate planning by those who are able to afford to do so. This results in a highly sensible use of the nil rate band by many wealthy individuals, who have had access to top advice informing them on the use of P.E.T’s and trusts (Lee, 2007). In turn, this means that those with enough wealth are able to avoid paying IHT. However, this is worsened when looking at middle socio-economic groups. Those without wealth to place into trusts or give away as P.E.T’s find themselves at a disadvantage, since they cannot avoid the tax. This often means those with moderate wealth find themselves deeply burdened by 40% upon their death estates. From this it can be argued that according to its own legal principle, IHT has been designed to achieve the exact opposite of what it causes in actuality. Simply, it is avoided by those who it was designed to ‘target’ and paid by those who it was designed to ‘help’. This is elaborated on in the following argument.
Enabling for careful estate planning to occur and allowing for the use of P.E.Ts and trusts, as (Lee, 2007) puts it, ‘to a degree favours the wealthy, who find themselves in the position to give away significant amounts of their wealth, whilst retaining everything they need to live their comfortable lives’. For example, if A and B own two houses, they are able to give one away to their children whilst still comfortably living. This is in juxtaposition to C and D, who are unable to give away any assets, since they would be left destitute otherwise, not having access to the luxury of giving away their second car or house. Here, a strong point can be made that IHT contradicts the legal principles that govern it and is not paid by all those who should pay it. As (Sandford, 1993) expresses “the wealthiest can afford the best advice on inheritance tax ‘mitigation’ and are also best placed to make gifts early (i.e., outside the period of seven years before death) and so tax free”. In short, only a small number of ‘loopholes’ can effectively be exploited by people in middle socio-economic groups. Thus, this clearly presents the degree to which IHT disobeys its legal principles. This significant legal fault is one that makes calls for IHTs abolition strong.
However, this opinion can be challenged, and it has been suggested by (ROWLINGSON, 2008) that ‘whilst [IHT] is a very strict tax, that this is a reason to oppose its abolishment’. The major anti-avoidance provisions littered throughout the taxes wording have a twofold effect.
Firstly, those who find themselves caught within the tax find it hard to escape without paying. Whilst in some cases this may act adversely, on the whole, it ensures that not all are able to escape the tax. Secondly, plans to avoid the tax all together, such as A and B placing their home into a trust for their children but still using the house as if it were their own, are harshly dealt with, by charging a strict annual income tax upon A and B. This is clear evidence that the court does not favour those who attempt, and in some cases successfully, to circumvent the tax. The courts disapproval is a sentiment that holds significant merit, and whilst the tax system may have unintentionally practically contradicted its purpose, it is obvious that this is not at the will of the court (HMRC vs Nader, 2018). This principally demonstrates that the tax has not entirely moved away from how it should act, and holds glimpses of promise, predominantly its strictness. Thus, it can be said that this does not warrant the abolishment of the tax from a legal perspective, but instead, motivates a need to reform the tax to make it as inescapable on the mega wealthy as it was on family C and D.
As such, to conclude the legal analysis/discussion, it has been seen that IHT does stray away from its legal principles. I feel that from a purely legal perspective, the abolishment of the tax would be counter-intuitive, adding flames to the debate that oppose the levying of greater taxes on the rich. The IHT system does have its legal merits, as mentioned in its particular strictness when caught within. Rather than completely abolishing these rules a simple re-evaluation of its strictness would disassemble much of the ‘abolishment’ argument coupled with a re-jigging of the purpose of the rule, specifically to ultimately reduce the ability for the wealthy to utilise P.E.Ts and trusts (potentially by capping how much can be gifted). Further, calls should be made to fixate upon a need to not disproportionately affect middle socio-economic groups and make sure that even though they have some wealth, they are not unfairly targeted. Hence, from a purely legal standpoint, IHT should not be abolished, instead it should be reformed, to fit closer in line with its own theoretical governing principles and those that also govern the laws in England and Wales.
An economic analysis/discussion of IHT:
As a tax that (Mirrlees & Adam, 2011) state was ‘birthed in order to tackle the mass concentration of wealth’, it is important to analyse whether IHT should be abolished from an economic perspective. This point will discuss whether IHT promotes economic equity, and hence influences the redistribution of wealth, coupled with whether it is an economically efficient tax.
Addressing whether IHT promotes economic equity can be seen through looking at the equality trust report (Jordhal,2007). It can be contended that since IHTs existence, there has been a greater re-distribution of wealth in the UK. Jordhal (2007) finds that this wealth redistribution has not slowly trickled down the ‘socio-economic’ ladder and has been readily enjoyed by the public. Lower tax rates, from 40% to 10% on all wealth above the nil rate band, have encouraged families to give the wealth the own to charities. This has resulted in the gifting of estates such as the Berrington Hall Montacute House and the Wallington trust, free for public use. In this sense, it is hard to say that the public does not benefit from IHT.
However, the implied point that IHT is an important contributor to the wealth distribution that has occurred in the UK can be undermined. ‘In comparison to the £127billion of inheritance and gifts within the UK, IHT is only effective in securing 3.5%, translating to £6bn’ (Corlett, 2018). This shows the limited extent to which IHT can effectively tax people, and re-distribute their wealth across the population. This point can be emphasised by looking at other similar capital taxes such as CGT, which generates £8.7bn. This clearly illustrates IHTs limited capacity as a money-making tax, and thus, presents the minute degree to which it has encouraged the already small amount of wealth redistribution that has occurred in the UK. Hence, it can be inferred that whilst there has been a correlation between IHT and greater levels of wealth redistribution, that this does not necessarily mean causation. As such, the argument stemming in favour of IHTs maintenance from this point is weak, and it seems feasible to call for its reformation to improve its efficiency and impact of economic equity at the very minimum.
Although, whilst the £6bn collected as of 2020 may not necessarily be a significant amount, it can be argued to be a largely irreplicable one, as (ROWLINGSON, 2008)states in her Ted Talk ‘[IHTs] yield would be hard to replace if it were to be abolished, even if it represents a small proportion of total tax revenues.’ It is largely the case that potential alternatives may be far more expensive for the government to run. For example, alternatives put forward by the Fabian Society that act as loss leaders. It is submitted that certain alternatives could do more harm than good, and would act as a drain on the public purse, potentially diverting funding from critical services such as healthcare.
On the whole, whilst the tax may not be entirely efficient, it can be contended that any other course of action may be far more expensive and thus, impractical for the government.
This point is an important one, although can be undermined through examining the importance of this £6bn in light of the excess economic burden IHT places on people. It is key to account for the added costs of the imposition of IHT, otherwise known as its ‘excess burden’. (Lee, 2007)explains the concept best “if an additional tax was placed on wholemeal bread, forcing the taxpayers who would normally buy wholemeal bread to instead buy white bread. That change in behaviour is an additional economic burden resulting from the imposition of the tax.” Inheritance Tax has a similar, but more serious and overlooked impact. Primarily, ‘[IHT] causes for the elderly [and businesses] to make gifts too early, resulting in assets being given to less responsible youths and decreases their financial stability’, (Debs, 2007). Hence, IHT results in the premature gifting of assets that result in weaker financial positions and a generally worse standard of living/chance of business survival. Thus, the £6bn that IHT generates comes as a ‘by-product’ of a significant number of peoples financial positions. These pressures alone may be overlooked, but it is the worsened impact upon the elderly and businesses, coupled with its inability to tax operate efficiently and meaningfully contribute to wealth distribution that makes a very strong case, from an economic perspective, for its abolishment.
Ergo, in concluding the economic analysis/discussion of IHT, it has been uncovered that IHT has encouraged a degree of wealth redistribution Corlett (2018) and further, is an important and largely irreplaceable form of income for the government Rowlingson (2012). Although, this comes at the significant expense of major inefficiency, an inability to meet targets of wealth distribution, high costs and excessive burdens placed on the elderly and businesses. This economic case presents IHT in a dire light. However, this should not warrant its abolition. As the only proper tax on wealth, it would be foolish to advocate for its outright abolition. Instead, IHT should be reformed and re-designed to properly bring about a significant shift in the concentration of wealth in the UK whilst operating efficiently and limiting excess burdens. This should be done in the interests of bringing about a degree of socio-economic welfare, even if it acts as a loss leader, given its wider future societal impact. As such, from an economic perspective, IHT should not be abolished, it should be reformed in accordance with the criteria and objectives discussed.
A Philosophical analysis/discussion of IHT:
This section will analyse whether a tax on one’s death estate is morally justifiable. Here, I will put forward the main schools of thought in favour and against whether IHT is morally justifiable, and so, find out whether philosophically the abolition of IHT is an argument that holds merit.
The argument in favour of the abolition of IHT is a strong one, and was communicated particularly well by David Cameron in a pre-election debate 'If you work hard and save money... and pay down your mortgage on a family home, then you shouldn't have to sell that or give it to the taxman when you die. You should be able to pass it onto your children. It’s the most natural human instinct of all’. This point relates specifically to the opposition of restricting ones right to bequest (as IHT does) and so does not agree with IHTs current morally justifiable ‘status’. Similarly, Milton Friedman argues that ‘It seems illogical to say that a man is entitled to what he has produced by personal capacities...but that he is not entitled to pass any wealth onto his children; to say that a man may use his income for riotous living but may not give it to his heirs. Surely, the latter is one way to use what he has produced.’ These points put forward are entirely founded, and significantly question the philosophical merit of a tax that restricts ones right to give away their own property. Both Cameron’s and Friedman’s argument’s stem primarily from the libertarian view (the philosophy that upholds liberty as a core principle) that holds the following argument.
The libertarian argument stems from the fact that you should not be disproportionately taxed given your good use of tools given to you by the state. Simply, you have put in the hard work and hence, you should be able to indefinitely enjoy the associated benefits of your efforts. This includes gifting your wealth however you please Bird-Pollan (2016).
However, the libertarian stance can be challenged. (HALLIDAY, 2013)points out that the main flaw in this argument is that it fixates upon the donor, and this focus on the donor distracts us from the importance of a tax on bequeathing wealth. When looking from a consequentialist’s perspective (the view that an act can only be deemed morally right purely based on consequences), the libertarian argument is flawed. Allowing a person to bequeath wealth with no limits would lead to far worse consequences than would occur if there were limits on such transfers. (Bird-Pollan, 2016) finds that ‘Churchill held a similar stand on this, commenting on the fact that the ability to bequeath an unlimited amount of wealth would result in the development of a race of idle rich’. This is only one of many negative impacts that a consequentialist would quote, serving to act as an example that presents the merit of an ‘Inheritance tax’.
Further, other philosophical stances oppose the abolishment of Inheritance tax. Firstly, the ability to undergo unlimited and unregulated transfers on one’s death estate is anti-egalitarian (it contradicts the philosophy that all people are equal, and so, deserve equal rights and opportunities). With a tax on this, the mega-wealthy are unable to significantly concentrate wealth in very small parts of the population. This causes for fewer instances of major material inequality and hence, a lack of equal opportunities to be successful. (Jørgen Pedersen, 2019). Additionally, the desert-theorist would also oppose the abolition of a tax on inheritance. The ability for people to be unable to gain huge volumes of wealth for little to no reason other than luck opposes the view that people are entitled to wealth based on hard work. This is arguably the strongest philosophical school of thought that opposes the abolition of the tax.
Although, whilst philosophically these views may hold merit, (Jørgen Pedersen, 2019) criticises these schools of thought by stating that they focus far too much on who inherits, rather than the pure facts of the case (opposing the view that we should focuse on the recipient, as the consequentialist argument suggests). Largely, it can be said that the egalitarian and desert standpoints fixate too closely on the practice of IHT and not who it truly impacts, being the donor who wants to give away their wealth. (HALLIDAY, 2013)makes a similar connection, stating that ‘[these] arguments in some senses are ‘forward-looking’ – they are only concerned by the facts to do with the impact of bequests and how it affects other parties. A philosophical analysis of whether there should be limits on inheritance should be more backward looking. This is what the libertarian view holds, focusing on the donor.’
Hence, in establishing the philosophical argument both for and against IHT, it is clear that both sides hold merit. However, I feel that philosophically, IHT is morally justifiable. Thus, I agree with the consequentialist and desert argument. This is largely due to the outward approach that they take. Contrary to the criticisms by Pedersen, looking at bequests from the perspective of a desert theorist or consequentialist enables us to understand the merits a restriction on the free transfer of bequests would have. This would be allowing us to tackle the mass concentration and unfair achievement of wealth. As such, from a purely philosophical and theoretical framework, IHT is morally justifiable and should not be abolished. However, it must also be contended that this does not mean that IHT should not be reformed. The ideal that the desert theorist and consequentialist hope to achieve from the imposition of IHT is a reality in the UK, particularly given its limited efficiency, effectiveness and principality, as previously discussed. In turn, IHT must be reformed to achieve the ideals supported by the desert theorist and consequentialist. This shall be done in my next section, that will attempt to discuss what other countries are doing and what viable alternatives there are to achieve this ideal.
Other countries/alternatives:
This section will discuss the IHT system remaining in France, this will be done to observe different IHT systems and see where our system could improve. It will then go on to analyse Australia and Sweden, where IHT has been abolished, to discuss the main reasons for its abolition, and what we can do to avoid such scenarios. Finally, it will look at independent alternatives to IHT, thought up by leading think tanks.
The French IHT system is one that we could learn from. The ‘recipient focused’ system only taxes citizens based on how much of the donor’s inheritance they receive and the relationship to the donor. The closer your relationship with the donor, the higher your ‘nil-rate band’ but the higher the tax rates if you exceed this as a beneficiary. This is opposite to the UK system. The donor’s estate is not taxed collectively before it is distributed at one fixed rate, it is subject to different nil-rate bands and different rates of tax based on the factors previously discussed. The property gifting system also differs, there are no P.E.Ts, instead, there are high fees placed on transferring estate ownership, a kind of ‘IHT-Stamp duty’ called the ‘Notaire’ (Anon., 2020). Elements of this system would be beneficial to implement, such as a lack of exemptions given P.E.Ts and trust. This would be key in amending the legal loopholes rife in our IHT system. Further, taxing based on relationship would also be key. Taxing close family members at higher rates, as they are more likely to have benefited from the donor’s wealth, would also be deeply important in reducing the benefit of those born into wealthy families. It would directly tackle the development of a ‘race of the idle rich’.
From looking at a country where the tax remains, we should also look at countries where it does not, to understand the reasons for its abolition, and thus, to understand what our system could do to avoid such circumstances. Looking at Sweden and Australia is most fitting, given their similar economic and social structures to the UK. In his paper on the fall of IHT in Australia, (Joshua S. Gans, 2006) states “Australia today remains one of the only developed nations without some form of explicit or de facto inheritance tax.” He gives three main factors to explain the reason for the abolition of the tax: the nil-rate band failing to keep up with the rate of inflation, the failure to truly look into the impact of such duties (excessive burdens) and the ease at which the tax could be avoided. The case in Sweden is not dissimilar, it may be more fitting when comparing it to the UK, given the social-democratic structure of its government that bears a resemblance to ours. In an address to parliament in 2005, (Ydstedt, 2020) states that the Swedish government conceded that the tax was unfair, too easy to avoid and ineffective in raising money. Parallels can certainly be drawn between these two countries and the UK, and to suggest that IHT should be abolished is not entirely far-fetched. However, what must be made clear by looking at these countries where IHT has failed, is to see exactly where we could improve to avoid such circumstances.
There are many alternatives/replacements to IHT that have been thought up, although, in my opinion, there is only one main viable alternative that would fit in the UK. This is the Lifetime Receipts Tax, proposed by (Corlett, 2018). This is a system that would entirely focus on the beneficiary. Each person has a Lifetime Receipts Tax allowance of £125,000, that would change based on inflation. Anything above this would be charged at a 20% tax rate, and anything above £500,000 at a 30% tax rate. Lifetime gifts given would be abolished, and transfers between spouses and charities would face no tax. Pensions and trusts would also be penalised and CGT on death would not be charged. (Rajiv Prabhakar, 2008) had a similar idea, but instead wanted to make the process far more ‘people focused’ and more accessible to the ‘elderly’. I feel that this system holds merit, and accounts for all of the shortfalls that our system currently has. However, as will be addressed in my conclusion, I believe that this is not the perfect model. Instead, a system based on this Lifetime Receipts Tax should be used but should be open to influence from the French system and the reasons for the collapse of the Australian and Swedish system.
Conclusion:
In analysing Inheritance Tax from a legal and economic perspective, it is submitted that overall, the argument in favour of its abolition is a very strong one. Objectively, IHT has practically failed in achieving its goals. Legally, IHT contradicts its theoretical purpose of being a law that is meant to be paid by and works fairly upon all. It seems as if its P.E.T and trust facilities are the main reason for this. Economically, IHT is futile in bringing about any significant redistributions in wealth and imposes unfair and unnecessary excessive burdens. As such, despite its theoretical philosophical merit, practically IHT is an inefficient and rather ineffective tax.
Although, whilst this may be the case, I strongly feel as if IHT should not be abolished. IHT does have some merits that cannot be ignored. For example, it is hard to avoid when caught within, and despite only catching 3.5% of all wealth that passes through it, courts do not take lightly to avoidance measures. These are promising signs. Further, IHT is the only tax on wealth distribution in the UK, and I believe that its outright abolition would be counter-intuitive. Simply, it would create an even greater opportunity for wealth to be concentrated in higher socio-economic groups. In principle, IHT is a good tax, and it does show some signs of hope. Given this, it would be far more appropriate to call for the reformation of the tax.
In submitting that IHT should be significantly reformed, I feel that this should be done through using the ‘Lifetime Receipts tax’ proposed by the Resolution Foundation. This change should be coupled with positive influences from the French IHT system and should learn from the mistakes of IHT in Australia and Sweden. Through this, IHT in the UK could be radically changed for the better. By introducing a newer system that directly combats excessive manipulation, alongside proactively dealing with the prevention of mega-wealthy dynasties built on inherited money, IHT may be able to reach its original, theoretically intended position.