The Inheritance Tax Conundrum

The issue of inheritance tax has appeared in the election campaign, just when we thought it was gone. It promises to drive a considerable wedge between the parties of the right and those on the left. It is an interesting tax to consider, both politically and philosophically. Politically it is a double edged sword. It is one of those strange issues where even people who will probably never have to pay this tax (how many people will leave £325,000 as a single person, £650,000 as a couple?) nevertheless oppose it. Perhaps they aspire to one day accumulating such a legacy, perhaps they just think it is morally wrong. So reducing inheritance tax is potentially a popular idea. The current Conservative proposal to abolish the tax on family homes left to children up to £1 million in value chimes with a visceral reaction to the idea of taxing something as personal and sacred as the family home. So, it makes a great deal of sense. On the other hand the figure of one million, might be a mistake. The very words, one million creates a problem. It is only one step away from the word millionaire. So, it looks like a tax break for millionaires. It is not, in truth, but it appears that way. Most people will never have to pay this tax so won’t really understand how it work so it does look to them like a case of helping the rich. On a philosophical level inheritance tax is less defensible. In principle it seems desirable and equitable to tax unearned income rather than earned income. Those who receive a sizeable legacy have not earned it. It is a windfall for which they have probably done nothing save have the luck to be the beneficiaries of wealthy deceased people. OK? Well, be careful. Is it a tax on the person or people who have died, or is it a tax on their descendants? If it is a tax on the deceased t is indeed probably a tax on earned income. This is what is often claimed. Why should the money be taxed twice? Once when it was earned and again when it was left by the deceased. So the question is – who is paying this tax, the dead or the living? The press provide an interesting insight here. The papers who don’t like inheritance tax call it a ‘death tax’, implying it is taxing the dead. More neutral views call it by its name, inheritance tax. This implies it is a tax on those who inherit. My personal view is that the dead cannot pay tax and are past caring so it is a tax on the living. Therefore it is a good tax because it is on unearned income and is therefore not a disincentive to work and effort. It is also good because it is avoidable as long as one leaves one’s fortune to one’s descendants or friends at least seven years before one dies. So an avoidable tax on unearned income. Sounds good , but not everyone sees it this way. It will be interesting to see whether opinion polls suggest this is a popular or unpopular proposal.