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Cutting inheritance tax isn’t progressive

When is he going to tell them their parents aren't subject to inheritance tax? Credit: Getty

November 18, 2023 - 8:00am

Less than 4% of estates are currently subject to inheritance tax, yet few Government levies rouse such deep levels of contempt from the public. In an ugly baby contest, the “death tax” would be the standout winner. So it’s no wonder that Rishi Sunak and his Chancellor are reported to be looking at cutting it, as they desperately grasp at whatever levers there are left to pull, all while the general election looms closer and the polls continue to worsen.

Despite such a small number of estates paying any inheritance tax at all, almost a third of people believe their own estate will be subjected to it, while 43% think they will be hit by a demand from His Majesty’s Revenue and Customs for any inheritance they receive in the future. Inheritance tax is one of the most misunderstood and misrepresented taxes in British politics.

It suits Jeremy Hunt to indulge the public in its incorrect expectation of being subject to inheritance taxation, quite simply because there is political credit to be claimed — even if there will be no difference made to the amount of cash in inheritors’ pockets.

Nobody should underestimate the power of inheritance tax to politics and headline writers. Gordon Brown’s plans for an early election in 2008 are widely regarded to have been derailed by then-shadow chancellor George Osborne, who pledged to increase the tax-free estate allowance to £1m at the 2007 Conservative Party Conference, putting the Tories on the path to victory in 2010.

But inheritance tax is entirely the wrong priority for tax reform. Post-tax incomes haven’t grown in nearly two decades, not helped by frozen thresholds pulling ever lower income levels into the higher rate tax band through fiscal drag. Cutting the headline rate of income tax, or raising income tax thresholds, would make a far greater difference to the finances of normal people than prioritising the gifting of free, unearned money to the Hatties and Hugos of literal millionaires.

My marginal rate of taxation stands at over 50% — we tax aspiration and striving more than we tax happy and effortless accidents of birth. And marginal income tax rates can go higher than that, particularly once one accounts for child tax credit being withdrawn at higher incomes. 

A single earner with three children could see a marginal tax rate of 68% at perfectly reasonable middle-manager salary bands, meaning every additional £1,000 earned sees take-home pay of only £320. That’s on top of the UK having some of the highest childcare costs in the OECD.

It’s often parents who are most defensive of inheritance tax, rather than potential inheritors. They can see it as the only escape valve for their children being able to afford a home with prices as they are today.

If you want your kids to climb the first rung on the housing ladder, fighting for their stagnant post-tax incomes will probably help them a lot more than a deposit gifted when the children themselves are in their sixties. It’s not like the gifted money will put your children ahead of your neighbour’s — they’ve already had exactly the same idea.


James Sean Dickson is an analyst and journalist who Substacks at Himbonomics.

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AC Harper
AC Harper
8 months ago

The whiff of reducing or removing Inheritance Tax is not progressive or regressive in intent. It’s a stunt before the next General Election. The only measure of worth in such a reduction is whether or not more people will vote Conservative.
Just as Labour will trail the prospect of larger Minimum Wages or something else that will get more people to vote Labour.
Tax reform is well overdue but it serves both main parties to keep it complex to allow election ‘fine tuning’.
A pox on both their houses.

Peter B
Peter B
8 months ago

Why does it need to be “progressive” ?
There’s a rather puerile class war tone to the article.
For sure, there’s an argument to be made here in favour of some form of inheritance tax (my own feelings on this subject are conflicted), but class politics isn’t part of it.
Worth noting that George Osborne’s increase in the IHT threshold to £1m never actually happened. Most politics does seem to be symbolic (gesture) only these days.

kevin smith
kevin smith
8 months ago
Reply to  Peter B

it did reach £1m in a roundabout way for a married couple with the £325k plus the additional relief of £175k on property left to direct descendants, So it is somewhat incomplete as it exludes non married couples., those without children & those who remain single.
Whilst a IHT reduction might suit me personally ( or rather those who will inherit from me) I don’t believe this is the time to do it.
I would however agree that just giving everyone £500k would be more equitable & simplify the admin whilst not costing much yet perhaps scoring some political advantage.

Geoff W
Geoff W
8 months ago
Reply to  Peter B

I think finance journalists apply “progressive” to a tax (or a change in tax) which benefits a lot of people. The opposite is “regressive,” rather than “traditional” or “conservative” or “reactionary.”
As to “class warfare,” the last part of the article goes into bat for middle-class people with marginal tax rates of 50% or more – not exactly Corbynista politics of envy.

Last edited 8 months ago by Geoff W
Peter B
Peter B
8 months ago
Reply to  Geoff W

Yes, I read that too and agreed with some of what he wrote.
But then he’s off both claiming that cutting inheritance tax would “make no cash difference to people” and then implying it would with a quite unnecessary bit of class stuff here – is there something automatically wrong with being a millionaire ?
“would make a far greater difference to the finances of normal people than prioritising the gifting of free, unearned money to the Hatties and Hugos of literal millionaires.”
He doesn’t even seem sure in his own mind whether cutting IHT would make some people richer or not.
Yes, I’d rather see taxes on income lower than on unearned (but crucially already taxed once) income. The whole IHT regime is a complete mess (things like farms being exempt, but other assets are not). And the 60%+ marginal tax rate over 100K is ridiculous. Done by the Tories though.

Philip Stott
Philip Stott
8 months ago
Reply to  Peter B

It has to be “progressive” to prevent lefties complaining that any change is the evil Tories helping their rich mates.
What they don’t seem to understand is that for tax to be truly fair and “progressive” then everyone should pay the same rate.

David Lindsay
David Lindsay
8 months ago
Reply to  Peter B

It feels vulgar to mention that abolishing or significantly reducing inheritance tax would benefit Rishi Sunak’s daughters to the tune of hundreds of millions of pounds. But that is the case, and their good fortune would be on the backs of millions of people who were very poor even if they were claiming Universal Credit fraudulently, since no one on, say, an MP’s basic salary of £86,584 per year, fiddles an extra 90 quid a week, if that. Yet all we hear from the Labour Party is that none of this would go far enough. The last Labour Government effected the biggest upward redistribution of wealth in British history.

Dougie Undersub
Dougie Undersub
8 months ago
Reply to  David Lindsay

Come off it David. The Misses Sunak can be confident their inheritance will be well out of the grasp of HMRC by the time Rishi meets his maker.
As for your claim that no-one on an MP’s salary bothers to fiddle an extra £90p.w. you seem to have forgotten all those claims for paper clips or a bag of crisps on MPs’ expenses.

Albireo Double
Albireo Double
8 months ago

The IHT threshold is effectively set at £1m already in most cases as others have said – it would be easy and cheap to tweak it to officially set it there. When executing my late father’s estate recently, I was astonished at how many exemptions there are.
The author is quite right to say that it is the most misunderstood of taxes. It’s also barely thought about by most people, most of the time, for the simple reason that they don’t encounter it, until a benefactor dies.
The principle of further taxing income already taxed is widespread and common (VAT?), as is even the principle of a tax on a tax (VAT on fuel tax?). Both may or may not be “unfair” and annoying, but neither is new, or limited to IHT.
The debate is not a principled one, it is purely political. Personally I don’t think that scrapping IHT will buy the Conservatives a significant number of votes at all. I think they’re barking up the wrong tree altogether.
This be me also barking up the wrong tree, but I think that the migration issue (legal and illegal) is now big, having finally escaped the desperate attempts of “big establishment” to deny both its existence as a problem, and any discussion of it. I think that’s the cat that’s out of the bag – and it’s a cat that the establishment of all political sides desperately want back in its bag.
This is why I think that the IHT “problem” is raised in the media by those who do, purely as a political distraction. In the case of this article there are plenty of clues pointing to that, in the political nature and language of the article itself. We’re not being told to consider IHT. We’re being told to stop looking elsewhere.

Last edited 8 months ago by Albireo Double
Giles Toman
Giles Toman
8 months ago

Let families build up serious wealth down the generations. Then they will be increasingly independent of government handouts and petty taxes. They will be independent forces in the land. Of course, this is why governments like IHT, because it limits familes having financial independence from them. People who only have what they earn each month are far more beholden to the state than those who don’t need anything from the government except to be left alone.

Alan Elgey
Alan Elgey
8 months ago
Reply to  Giles Toman

‘Let families build up serious wealth down the generations.’
I agree with this in principle because it seems to me to fit with human nature (to want to do the best for the descendants).
However, this is not the best argument as history is littered with families where the ‘founding father’ has accumulated lots of wealth which has been frittered away by the second or third succeeding generations of wastrels. (And a few of course where the successors have done even better than their forbears.)

Gerard A
Gerard A
8 months ago

It may not be class politics but its consistent with Sunak/Hunt’s policy of tax increases for the poor or average earners (eg freezing tax thresholds, NI levy) and tax cuts for the wealthy (eg lifting of limetime pension allowance) over the last couple of years.
How on earth they can think that this will keep their seats in the former red wall and other marginals is beyond me.

Last edited 8 months ago by Gerard A
Peter B
Peter B
8 months ago
Reply to  Gerard A

The Red Wall and marginals are probably already gone. This feels more like a desparation ploy to hold the Blue Wall. The people coming up with this stuff hold the “safe” Blue Wall seats (like Jeremy Hunt). I’m not sure they ever really cared about the Red Wall – or the midlands and northern marginals.

Susan Grabston
Susan Grabston
8 months ago

Wrong tax to cut. We should be focusing on making R&D/ real investment reliefs permanent. IHT is downstream of wealth generation. Start at the source and when you have the luxury of growth (what that?) consider how you preserve the fruits of that endeavour.

Michael Cazaly
Michael Cazaly
8 months ago

The statement in this essay that Inheritance is “effortless” is entirely wrong.
The giver has put effort into creating or maintaining the Inheritance, usually with the express intention of providing the beneficiaries with some security in life.
That in itself is a laudable aim and entirely in keeping with promoting the family, the cornerstone of human existence, but much disliked by the Left who have made great efforts to destroy it (although it is notable how well their offspring do…).
The entire concept of IHT is flawed. Wealth needs to be created, not destroyed, and then the income taxed.
It is ridiculous to shoot a cow for food when it produces milk.

Right-Wing Hippie
Right-Wing Hippie
8 months ago
Reply to  Michael Cazaly

The statement in this essay that Inheritance is “effortless” is entirely wrong.
Exactly! I mean, you know how hard it is to get arsenic these days?

Michael Cazaly
Michael Cazaly
8 months ago

No

John Riordan
John Riordan
8 months ago

No, it’s not Progressive, but why say it as if it’s a bad thing? Progressive taxation is both destructive and unjust. And in any case the recommendation instead to raise middle-class post-tax incomes by changing the tax bands or thresholds – which I agree with by the way – is itself also not Progressive, so the article isn’t even self-consistent.

Raise the 40p and 45p thresholds by the RPI growth since about 1986, putting the 40p band at £144,000, and the 45p band at £392,000. Or, neater, just move the 40p band to where the 45p band is now at £150k, and make the 45p band £400k. This would still be “progressive” by the way, it’d just be progressive taxation at a level that doesn’t destroy the vibrancy of the economy.

Genuinely non-progressive taxation would be every adult, working or not, pays the same poll tax to the government for the services that the government provides. Sure, it’d be about £20,000 each, but it would have the benefit that nobody would tolerate government waste just because they think some rich b*****d they don’t know is paying for it, which is the main reason nobody presently bothers holding the government to account.

Jonathon
Jonathon
8 months ago

I’m not at heart a fan of inheritance tax, but at this very time I don’t think it’s the tax to be cutting. Let’s see if we can cut the tax that will affect the broadest number of citizens first.

j watson
j watson
8 months ago

It’s about shoring up some of the Blue Wall. We all know that. It’s the nadir of 13yrs.
What the Right should be pondering is some economic fundamentals and it may be that a time in Opposition crucial space in which to do that. The sort of thing, they and Labour, must consider are: 1. How to reduce ‘concentration’ and better stimulate effective competition – don’t allow big companies to gobble up others 2. We’ve too much debt and credit – symptom of way allowed finance market to develop – tax debt interest same as equity & consider financial transactions tax. 3. Reform Joint Stock Corporation – maximising shareholder value is insufficient and myopic. 4 Reduce Inequality – corrosive – tax system reform incl who takes the tax burden – alleviate the inequity of how much falls on the young, better educational opportunities etc. The fixation on Inheritance Tax when there is so much else we really do need to reform almost criminal. 5 Strengthen democracy – weaken the role of money in who gains power. Democracy not plutocracy.
Tories or Labour, maybe with their own tweaks in emphasis, could do all the above and we’d better for it.
Instead of course we’ve tended to chase identity politics, woke/anti-woke twaddle, and Brexit ‘no plan’ nirvana

Last edited 8 months ago by j watson
Hugh Bryant
Hugh Bryant
8 months ago
Reply to  j watson

Lots of great ideas for milking the productive economy. But (of course) no mention of reforming the housing market or tackling any of the other forms of middle class parasitism. Why am I not surprised?

j watson
j watson
8 months ago
Reply to  Hugh Bryant

I think you show you may appreciate symptoms but not the underlying causes HB. You need to get below the things you rage against and be more inquisitive. All 5 would lead to improvements in how the housing market functions.
And your middle class ‘parasitism’ isn’t well defined but again all 5 lead to a fairer, almost certainly richer, society.

Hugh Bryant
Hugh Bryant
8 months ago
Reply to  j watson

I think you need to take a year or two of sabbatical and get out of the public sector bubble. Then you might understand that all our economic and social problems are created by the same thing: over-centralised government. Your solutions (ie: even more over-centralised government) are therefore highly unlikely to haver any kind of beneficial impact at all.

Caradog Wiliams
Caradog Wiliams
8 months ago
Reply to  j watson

I sort of agree with you but everything you are saying is simplified to the point where it has no practical meaning.
1) Yes, the tax system is unfair. Yes, young people are having a tough time. So, tax the rich. Who are the rich? Well, anyone who owns a house is relatively rich and house owners tend to be older people. So the new way is to tax the old to give to the young. Sounds like a plan and it is happening soon in Wales. But here’s the problem – everybody gets old and if you know that you are going to bare the brunt of tax in the future, you max out your credit.
2) As you say, we have too much debt and credit and I have just created more by the stroke of a pen. Limit credit so that people, especially the young, have fewer hopes of owning things. Sounds like a lot of unrest to me.
3) Don’t let big companies gobble up small companies – fix the market to remove economies of scale. Prices rise and young people get less and less.
4) Better education. Yes but what education? Do we really need more Media Studies graduates? Education is viewed as synonomous with schooling. Schooling has become ‘Let the children do as they want. Let them express themselves more.’ And it clearly has not worked.

Not one of the politicians in Westminster has a clue what to do. There are the crackpots in Scotland. Only in Wales is there a clear view of the future.

j watson
j watson
8 months ago

Not sure you grasped the points that well CW. 1.Just study how NI payments work and how regressive they are against the young and low earners. Could be easily changed 2. We’re referring to the way Business and Finance work here. The fact interest is a tax deductible means Companies are incentivised to load up on debt with all the problems that brings rather than use equity they generate through effective business practice. 3. Well managed competition usually reduces prices and improves quality. Monopoly positions do neither. 4. How many apprenticeships do we have now compared to 50yrs ago? And we need much more in high tech. You half got the point but had too narrow an interpretation.
I think some politicians grasp what must be done, but not enough of us understand…yet.

Andrew Fisher
Andrew Fisher
8 months ago
Reply to  j watson

You are dead wrong that the ongoing cultural revolution in much of the West is “twaddle” or insignificant. Freedom of speech – more accurately what ideas are even allowed in the public forum has already been significantly curtailed.

Immigration is at eye wateringly high levels. London is a 60% foreign born city with a literal babble if hundreds of different languages being spoken as a first language. I live there, and I see and hear this daily. How on Earth can you build any social cohesion from that?

Economics is important – it isn’t everything, by a long shot.

Dougie Undersub
Dougie Undersub
8 months ago

Only a small percentage of estates pay IHT but a much larger proportion of families fear they may have to and change their behaviour accordingly. Roy Jenkins famously described Death Duties as “a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue”. It raises a tiny sum and costs a lot to administer – all that poring over asset valuations by HMRC.
It’s every parent’s natural instinct to want to pass on wealth and advantage to his or her offspring. Taxation that contradicts human nature is bound to be unpopular.

David Morley
David Morley
8 months ago

we tax aspiration and striving more than we tax happy and effortless accidents of birth

And as Piketty has shown, it is the elite accumulation of wealth that is the bigger inequality issue that we face. A bigger issue than income inequality.

Dominic A
Dominic A
8 months ago
Reply to  David Morley

What is the difference between elite accumulation of wealth and income inequality?

David Morley
David Morley
8 months ago
Reply to  Dominic A

In simple terms income is what I make every month. Wealth is the money I have in the bank (assets etc). Wealth accumulates of itself (through interest etc) and can be passed on.

The negative side of this is that wealth is heritable, and this works against equality of opportunity and social mobility. To some extent income level is heritable (nepotism, being sent to the right school, having the right connections etc) but much less so.

Dominic A
Dominic A
8 months ago
Reply to  David Morley

Ah, so on one side, earned income, and wealth that has accumulated through that means (as an ‘elite’ or not); on the other hand, unearned income, and wealth that has accumulated through that means? Tax the latter more than the former seems right.

j watson
j watson
8 months ago
Reply to  Dominic A

Even more the problem has been long term returns on capital stuck in assets has been greater than investing in innovative new companies and businesses that create jobs and spread wealth better. When I try to explain this to friends one of the easier examples for them to understand is how someone like Alan Sugar started out producing PCs and created manufacturing jobs, but now has become a property and asset management corporation. Easier and less risk, but with a consequence for the economic health of a country that no longer makes enough for itself.

Juan Manuel Pérez Porrúa
Juan Manuel Pérez Porrúa
8 months ago

Whatever it is or is not, be it “progressive” or reactionary (God forbid! Amma right?) cutting inheritance taxes is good economic policy. I’d say it is moderately good, since the ideal policy would be to eliminate such taxes altogether (along with all taxes on the value of any asset), and then make them unconstitutional, so that future demagogues (inside Westminster, outside of it, and in the press) and mobs of resentful, ignorant voters will not even be tempted to propose or demand them.

Last edited 8 months ago by Juan Manuel Pérez Porrúa
Brian Villanueva
Brian Villanueva
8 months ago

The hidden assumption here is that parents have a right to pass their resources to their children upon death. While this certainly has a long tradition in Western law, whether it is an innate right (or even a social benefit) is rather dubious.
The innate right argument rests largely on libertarianism, the notion that you own your body so therefore you own what you produce. None of the Abrahamic religions really endorse this though. All view your physical and intellectual abilities, and therefore your wealth derived from those abilities, as gifts from God and therefore not entirely your own.
The social benefit argument is perhaps more convincing, but it is very susceptible to criticism of being elitist and aristocratic. We instinctively believe that people only work hard and take risks for potential profits, but successful entrepreneurs talk about being driven internally, often taking absurd risks that no one saw the profit in. So does the ability to will your estate to your kids really make people more productive? Debatable at best.
I’m not necessarily endorsing a steep inheritance tax here, but I do believe we’re moving in the wrong direction when we keep reducing them.

John Riordan
John Riordan
8 months ago

Whether or not the Abrahamic religions support modern property rights isn’t wholly relevant, surely? And you’re talking here about whether inheritance is justified at all, not whether taxing it is.

If you don’t agree with the right of inheritance, can you explain what alternative system would apply. The government simply gets the lot upon the death of everyone? Really? After looking at the ridiculous incompetence the government displays when getting as much money as it does and the fact that government incompetence rises in direct proportion to the amount of tax it receives, you would argue that the government should have even more of everyone’s wealth?

Or perhaps there’s some other alternative I’m not spotting here? Absent the right to pass one’s wealth to one’s children though, I can’t easily imagine what the alternative is apart from the state gets its hands on it.

Last edited 8 months ago by John Riordan
Brian Villanueva
Brian Villanueva
8 months ago
Reply to  John Riordan

Out of curiosity, why are you so averse to “the state getting their hands on it”? In modern countries, the state consumes 30-50% of GDP. It has to levy taxes somehow. I agree with you (I think) that a far more limited government would be an improvement, but that’s a separate fight from “what is the best way to find govt?”
Income taxes are fairly easy to dodge, and the higher your income, the more incentive you have to do so. Sales taxes are easy to collect but highly regressive. Tariffs are also easy to collect but easily gameable by politically connected companies. Property taxes are ideal: hard to dodge, progressive, and with only minor disincentive properties. Inheritance taxes are somewhat easier to dodge (particularly in a globalized economy) but I still believe they have a significant place, if for no other reason than aristocracy is in tension with meritocracy.
Property and inheritance taxes are both basically wealth taxes. The only question is whether they are annual or over a lifetime.

John Riordan
John Riordan
8 months ago

“Out of curiosity, why are you so averse to “the state getting their hands on it”?”

I think I already explained this in my first reply, surely?
As for your accurate description of which taxes are progressive and and which are regressive, why do you take it as read that regressive is bad and progressive the opposite? Like I already said, the progressive nature of the existing tax base is why the government can be so corrupt, bloated and inefficient, to say nothing of the essential unfairness that progressive taxes are collected on the same principles as shakedowns and racketeering.

Why does a person owe the government more just because they are more productive? Other than, of course, the less productive would rather have it that way?

Last edited 8 months ago by John Riordan
Matthew Powell
Matthew Powell
8 months ago

Politically it looks bad but it’s an awfully designed tax. The very wealthy just transfer their money early if they don’t need it to maintain their standard of income, whilst those who are just past the threshold end up paying the most as they can’t afford to do the same.

If wealth is transferred early, then the tragedy of an unexpected death can be compounded by a huge tax bill at the same time. Hardly compassionate or fair.

Finally, why shouldn’t we reward parents who save their money for the next generation? Should we instead encourage them to blow it all on frivolous activities instead of investing it and passing it on. Perhaps we should apply capital gains, a truly unearned income, to property but investing and saving are positives which should be encouraged, not resented.

David Wildgoose
David Wildgoose
8 months ago

A minor (but useful) reform would be to levy Inheritance Tax on the recipients rather than on the entire estate.

It might be an incentive to spread the wealth if nothing else.

Mr Sketerzen Bhoto
Mr Sketerzen Bhoto
8 months ago

Surely taxing unearned wealth is the essence of being progressive. Despite the modern right now hating “elites” as much as the left they are still in thrall to the 4%

Michael Cazaly
Michael Cazaly
8 months ago

“unearned wealth” is a ridiculous concept, entirely devoid of real meaning.
What does “unearned” actually entail?

John Riordan
John Riordan
8 months ago
Reply to  Michael Cazaly

The most common example of unearned wealth is the tax that the government takes from each citizen. The size of the tax wedge taken from each person bears no relation to what that person takes from the system, and in addition is a perverse disincentive against how much that person contributes the system, with their liability to the government rising disproportionately as they become more productive.

I know of course that when the sort of people who talk about unearned wealth mention it, that’s not what what they mean.

David Morley
David Morley
8 months ago
Reply to  Michael Cazaly

It means that you do not work hard to earn it. At the extreme you don’t work at all.
If I own a lot of property which I rent out, employ others to do the donkey work of managing it, and simply sit back and watch the money come in – that’s unearned income.

Alan Elgey
Alan Elgey
8 months ago

So are you equating being progressive, and the righteousness of taxing unearned wealth whatever you mean by that, with hatred? Your wording certainly suggests this.

Last edited 8 months ago by Alan Elgey
Andrew Fisher
Andrew Fisher
8 months ago

I do not have a problem as such with taxing inheritance. However what can be very worrying and frustrating , is that probate cannot be granted until inheritance taxes paid. In that case money may need to be borrowed to pay the tax bill and this can be a real issue.

Surely it would be far simpler to simply tax beneficiaries in the same way as other capital gains?

David Yetter
David Yetter
8 months ago

Rather than abolishing the inheritance tax, it might be more salutary to reform it. Base the tax and the level at which it kicks in not on the total value of an estate, but on the value of a bequest to a particular individual (or corporation, perhaps excluding charitable organizations). This would encourage those with large estates to benefit more people, rather than simply setting their estate on their child(ren) or a single favorite relative or friend.