Jeremy Hunt is prioritising the wrong reforms
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 And marginal income tax rates can go higher than that, particularly once one accounts for child tax credit being withdrawn at higher incomes.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.