Inheritance tax is a tax on laziness

A tax on love: that’s how my most right-wing friend once described inheritance tax. He was wrong. If anything, given how easy it is to tax-plan your way out of single penny of liability, it’s a tax on laziness. It’s also one of the most structurally silly taxes on our statute book.

Inheritance tax doesn’t penalise love, and not only because love can’t be measured in cash. The truth is when one generation gives its wealth to the next, they’re not just communicating affection, they’re transferring privilege. However much we may want to see our kids inherit the things we worked to earn, our desire to do so undermines social mobility. So, just as the state must break up monopolies to allow competition to thrive, it has a legitimate role in breaking up the chain of inheritance.

Unfortunately, our current inheritance tax system doesn’t do that. The threshold is too high: you can inherit more than £800,000 tax-free so long as most of it is in property. Avoidance is too easy, meaning those with the most wealth are often the least likely to pay. But most important, the structure is stupid, with taxes levied on the estate as a whole, no matter to whom it is passed.

Imagine you die tomorrow leaving an estate of £1 million in cash. (I’m sorry to give you this imaginary million just as I hypothetically kill you, but I hope it will be useful.) Your executors will have to hand over £270,000 in tax.

Now imagine you decided to leave the money to someone exhaustingly well-off: a male BBC presenter, for example. If he earned a million pounds, he’d have to pay 45% tax. But because he inherits it from you, he pockets £730,000 – effectively benefiting from a tax rate of just 27%.

That doesn’t seem fair. So perhaps, instead, you’ll decide to pass on your millions to a hundred job seekers struggling to make ends meet after their local factory closed down. If they earned £10,000 they wouldn’t pay a penny in income tax. Unfortunately, because they inherit it from you, they get whacked for the 27% and only end up with £7,300 apiece.

In real life, the choices may not be so stark. But I don’t think you need to be a particularly ardent social justice warrior to see there’s something deeply askew in a tax with such perverse results.

Other countries do things differently. They tax the recipients of inheritance – and in the best systems, at a rate appropriate to the recipient’s wealth, not the donor’s.

The obvious benefit of this is to encourage people to disperse their wealth widely at the point of their death. Even passing on inheritance to grandchildren or great grandchildren would do more for social mobility than the current norm of handing everything over to the next generation. After all, with life expectancy now well into the 80s, most of those inheriting the precious ‘family home’ are already in their fifties or sixties, already established somewhere else.

You can earn about £11,000 a year tax-free. You can make about £11,000 of capital gains tax-free. So why not let people inherit £11,000 a year tax-free too, and charge an appropriate marginal rate on top, mirroring income tax rates?

I know the obvious criticism: this could bring the vast majority of inheritances into the scope of some kind of tax, when the current system only hits about 23,000 estates a year – 4% of all deaths.

Well, if there were revenues, I’d be delighted to use the proceeds to bring down income tax – far better to incentivise working than sweet-talking your way into elderly relatives’ wills.

But there might not be revenues. Under my system, you could bequeath billions without incurring any death duties at all – so long as you were willing to spread your munificence widely. It’s also possible that every pensioner in the land would be so horrified by the prospect of this new tax, that they spent every penny they had – with equity release to extract the last ounce of value from their home.

When I look at my own parents, I can’t help thinking that would be the best outcome of all. After all, real love isn’t watching your parents scrimp and save to protect their cash legacy. Real love is making sure they live the best life they can, and taking your inheritance in memories.

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Polly Mackenzie is Director of Demos, a leading cross-party think tank. She served as Director of Policy to the Deputy Prime Minister from 2010-2015.

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