Recent political debate in the UK has been seized by an abstruse discussion of the merits of inheritance tax. Politicians have been wrong-footed; no-one, it seems, can remember what the tax is for, which makes it rather difficult to justify.
There are four main arguments for taxing people on legacies.
- Inheritance tax is highly progressive. It is solely related to ability to pay.
- The capital gains on a person’s principal residence property are untaxed while someone lives there, and finally realised only when when they do not; death and probate are the best time to tax. Other property which is held would have been subject to capital gains tax.
- Both the capital gain on property, and the legacy made after it, are unearned windfalls. The taxation of legacies is unrelated to economic incentives.
- The persistence of inherited wealth across several generations is one of the major sources of inequality in the UK.Inheritance tax breaks the link.
The case against inheritance tax is that
- People’s holdings have been taxed once already. This is largely untrue. The principal source of wealth in the UK is not holdings derived directly from income, but real property; the main reason why large numbers of estates have been brought into the tax bracket is the increase in house prices.
- People have an aspiration to pass their goods to their children. They may have, but that is possible only if they have children. There are no criteria to distinguish family legacies from others.
- Inheritance tax is inequitable. The taxation of residences leads to inequities when people who share the residence are required to pay tax from capital they cannot realise directly.
Only the final criticism has major substance – but none of the current proposals attempts to deal with it.