The debate over inheritance tax continues to flare. After protests over the slashing of exemptions which threatens small family farms, yesterday the body representing the nation’s family businesses wrote to the Chancellor about the threat to their 160,000 members.
The issue seems to be thought of in the Treasury simply in acquisitive terms. Can the government get away with stinging families for more? If so, how much can they grab before the political pressure becomes too great?
Inheritance is treated as an uncontroversial thing to tax – and someone’s death, therefore, is simply an opportunity to grab money when the bereaved targets are sufficiently vulnerable and easy to target.
That’s one reason why many voters find this tax unpalatable. As if working, living somewhere, paying your bills, eating, travelling, and then saving and investing what remains for your retirement weren’t enough opportunity for the taxman – via income tax, national insurance, stamp duty, council tax, VAT, fuel duty, air passenger duty and more – it seems a final, tasteless insult to tax you again for having the temerity to die with anything left over.
The unpleasantness of a death tax is a powerful, popular motivator that politicians should take in to account. But if that’s too emotive for them, they should also consider the way in which inheritance tax runs directly contrary to so many of the things they ought to want.
It’s useful to assess any given tax by considering what it penalises, and what it can discourage.
In this case, it’s a particularly stark test. Inheritance tax directly attacks one of the most fundamentally good human instincts – self-sacrifice in the cause of caring for your loved ones – and penalises a host of positive actions taken to fulfil that instinct. It’s a universal desire, hence the unpopularity of inheritance tax even among those who are unlikely to pay it.
An inheritance doesn’t come from nowhere. For all the caricatures of unearned income falling into people’s laps, someone’s estate arises from choices they made while living.
They have often chosen to work hard, to save, and to set resources aside for tomorrow rather than splurge today. Many built up businesses, or paid a mortgage, or invested in a pension. They could have chosen not to earn in the first place – or, having done so, they could splash all the cash on themselves.
Even if they were lucky to buy a house when they did, or benefitted from some other windfall, that choice not to just take up racing fast cars or an extravagant drug habit should itself be praised.
Instead, they chose to act for the long term – preparing for retirement, protecting against illness and old age, and storing up a shield against economic insecurity that might strike down the line. If they were fortunate enough to have children, they did what parents so often do: they passed up their own gratification so that their kids could have a better life.
These things ought to be obviously laudable on moral grounds. These are actions of duty, responsibility, kindness and love.
If that isn’t enough reason to think twice, consider this: these are also praiseworthy actions in terms of public policy.
What do our politicians say they want? Long-termism, not short-termism. A savings culture, not reckless debt. Social stability in uncertain times. Entrepreneurialism, driving economic growth. A population which builds up pensions to fund their own social care. As the Labour manifesto put it: “Alongside strong national finances, Britain needs resilient family finances, too.”
What happens if policy punishes these things, and incentivises the opposite?
There’s no point saving, because the money will be taken away. Dying with cash in the bank before you’ve spent it all becomes a mug’s game – a wasteful error. Overestimating your life expectancy or your social care needs will no longer have the reassuring compensation that if you go, then at least your kids will benefit from your work.
Developing a family business, or slogging your guts out on a family farm, creates an opportunity for HMRC, not for those you love – and the thing itself may have to be broken up to pay the bill.
The message is clear: be short-termist, spend today instead of saving for tomorrow, provide your children with luxuries rather than security, don’t invest in the hope of developing your business, and ignore the risk of problems later in life.
The knock-on effect is grim. More people, with fewer reserves, will have to rely on the state in a crisis. Meanwhile, there will be less appetite for business risk, because the rewards for investing are being cut back heavily.
Is this really the social and economic impact the Chancellor desired from her Budget? It runs counter to her own stated aims.
It may be the impact that some dogmatic activists for inheritance taxes want. You don’t have to search far to find those who take perverse glee in the prospect of breaking up family businesses, raiding the product of other people’s life’s work, or actively undermining the natural instinct to provide for your family. I doubt that Rachel Reeves would sign up to such an agenda.
We do know that the Chancellor wants to raise more money to close the fiscal gap. This goal looks set to fail as a direct result of these very flaws in inheritance tax, too. The reduction in investment, the lost jobs and the change in behaviour the tax raid actively encourages are now projected to cost the Exchequer more than a billion pounds more than it brings in, according to analysis by CBI Economics.
Losing revenue by raising taxes is bad enough. By raising this particular tax, our society stands to lose a great deal more than just money.
'President Musk' is flexing his muscles and revealing how weak Trump is