Tuesday, August 29, 2006

IHT and the Reptile

Conservative Party Reptile has an eminently sensible solution to the vexed question of Inheritance Tax.
So, to draw the sting from the issue altogether, by solving the problem of fiscal drag, as well as the issue of one over-large asset, the Conservatives should propose to waive IHT on primary dwellings. This exemption is already in place for other taxes (CGT on sale for example) and would at a stroke take the majority of estates out of the band, without it being easy to slur it as a tax cut for the rich. Easy really.

And meanwhile, over at Chris Dillow's place, there are some very sensible comments; the first is from Sam.
The big iniquity of IHT to me has always seemed to be that it introduces a tax on something which is usually untaxed unless death is involved - the act of giving someone some money.

The question is not "why should you pay more tax if your dad gives you a job than if he gives you an inheritance", it's "why should you pay more tax if your dad gives you money when he dies than if he gives you money when he's alive?"

Quite. And, naturally, Perry de Havilland chips in with a typically pointed comment.
I dislike the very idea of taxing the bereaved, but then I despise most of what the state does anyway so that is probably to be expected. As for how IHT incentivises people, I do not think it is should be the role of such an inherently cack handed institution (the state) to be trying to incentivise people *at all* regarding how to manage their economic affairs one way or another. The gall of an institution that prints fiat money, distorts the economy and deficit spends telling me how to run my affairs is just too preposterous.

This is, of course, exactly true and it is the reason that I so disagree with Master Dillow and others on this question.

The point is that this here interweb seems to be filled with people who are advocating the control of others and one of the ways that they would seek to do this is through tax manipulation. Very few people seem to consider tax as simply as method of allowing a government just enough money to do the tasks that we, as individuals, are unable to do.

Tax should not be used as a method of control: the government have no right to our money and they certainly have no right to control the way in which we live our lives (other than ensuring that we do not impinge on the freedoms of others). Tax should be spread as thinly and evenly as possible throughout the entire population; and the fairest tax is on labour since we all have to do it; or, rather, the fairest tax is on income, since we all have to have it to live. IHT is effectively a tax on capital and, as such, effectively discourages saving.

Naturally, Chris contends that abolishing IHT would discourage saving. This is, of course, horseshit based on pure economic theory and disregarding human psychology.
What we need, surely, is to end this "summat for nowt" culture, and to encourage work and savings. That means cuts in income tax should take priority.

Well, up to a point, Lord Copper. I agree about abolishing this "summat for nowt" culture, i.e. the Welfare State. The point is that those who have a lot of money tend to be those who have worked, saved and carefully husbanded their money over a number of generations: they then tend to instill those same values in their offspring. For instance, I have an expectation of a reasonably large inheritance when my father dies: however, I am still the almost only one amongst my friends to have a pension (despite nearly all of them being both older and better paid than myself).

If you reduce income tax for the poor are they going to rush out and put that extra cash into a pension? No; I guarantee that the vast majority of them will simply splash out on cigarettes, beer and more Lottery tickets. The poorest in our society actually tend to be those who spend everything that they have rather than saving it: that is why they are poor unto the nth generation.

If this were not the case, we wouldn't need to have the vast welfare system that we do.

6 comments:

Longrider said...

Being somewhat lazy, I'll repeat the comment I made on this subject over at Bishop Hill's:

It strikes me that there are two completely incompatible viewpoints on inheritance tax. Those in favour regard it as unearned income and therefore liable to tax as new income when it passes to the inheritor. Those against regard it as the result of hard work and thrift throughout a lifetime that the owner should be free to dispose of as they wish.

I fall into the latter camp, regarding inheritance tax as no more than state sponsored grave robbing.

Neal Asher said...

Admittedly, above a certain level inherited money often ends up in the hands of undeserving inheritors. They're receiving cash they never worked for and often did not have the ability or inclinaton to acquire. However, their spending habits are probably no worse than those of the arseholes now in charge of our country. Agreed: state sponsored grave robbing - but someone has to pay for Blair's job-hunting trips in the US and Prescott's croquet lawn.

Anonymous said...

It strikes me that there are two completely incompatible viewpoints on inheritance tax. Those in favour regard it as unearned income and therefore liable to tax as new income when it passes to the inheritor.

That's fine, except that it isn't taxed as income on the part of the inheritor - it's the estate of the deceased that pays the tax.

Also, of course, there is no logical reason for gifts from live people to be tax-free, but gifts from dead people to be taxed.

Will Williams said...

Ever thought of asking whether taking savings out of your control and handing them over to organisations you have little control over - pension funds - in return for tax break is what a truly enterprising society should allow?

towcestarian said...

anonymong 4.29

If you give away money within 7 years of death, the lovely boys and girls from the capital taxes office will go knocking at the door of the inheritor (not the estate). for their pound of flesh

In other cases, the estate pays the taxes on behalf of the residual beneficiary. The only case where an inheritor does not pay tax is if they inherit a fixed amount that is smaller than the net value of the estate after tax.

So basically anonymong, you are talking BOLLOX.

Anonymous said...

If you give away money within 7 years of death, the lovely boys and girls from the capital taxes office will go knocking at the door of the inheritor (not the estate). for their pound of flesh

Yes, gifts made by a person who dies shortly afterwards are effectively dragged back into the estate for the purposes of calculating tax. Doesn't change the fact that the gifts would be completely tax-free unless the donor happened to die within 7 years, though, does it?


In other cases, the estate pays the taxes on behalf of the residual beneficiary. The only case where an inheritor does not pay tax is if they inherit a fixed amount that is smaller than the net value of the estate after tax.


No, the IHT is paid by the estate, on behalf of the estate. The way most people's wills are structured, the tax does indeed come out of the residual beneficiary's(ies') share. Nevertheless, it is paid by the estate. That's why the tax-exempt threshold applies to the size of the estate, rather than the size of individual bequests.

If a legacy was taxed as income of the beneficiary, people would be paying whatever marginal rate of income tax was appropriate on it. That's not what happens.

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