Towards a citizen’s inheritance: reforming inheritance tax

Introduction Tarnished by emotive phrases, labelled the ‘death tax’ and ‘the tax on love’, inheritance tax (IHT) has become the bogeyman of British taxes. Add a link to house prices, the favourite topic of certain British newspapers, and a regular place in the headlines seems assured. But, like the bogeyman, many of the flaws of IHT are more talked about than real, and contain a large dose of myth and misunderstanding. This chapter argues that we need to defend the principle of a strong IHT, while at the same time recognising that there are some genuine problems with the current system. We must address the two together: to defend a strong tax, we need to reform its errors; to reform its errors, we must defend its principles. In reforming IHT, it may also be possible to raise modest revenues for an expanded citizens’ stake such as the Child Trust Fund (CTF). Debate on the future of IHT is active and aggressive. At its gentlest, reform is led by the Treasury, steadily closing loopholes, introducing new rules to prevent avoidance, and, in the pre-election budget of 2005, increasing the threshold. Raising the temperature slightly, the Fabian Society's Commission on Taxation and Citizenship in 2000 proposed that the formal incidence be shifted from the estate to the recipient – this is discussed in Section 2 of this chapter, at p 43. In August 2004 the headlines were briefly filled by the preliminary publication of this paper, suggesting that IHT should be banded in a way similar to income tax. The press commentary, dividing relatively clearly between left and right, showed again that IHT provokes interest far beyond its size in terms of revenue or number of taxpayers. It demonstrated a clear appetite for reform, but also that the cost of opening the debate may be to unleash abolitionist forces that would otherwise remain dormant. At its most aggressive, argument on IHT was taken up by the Conservative Party ahead of the 2005 general election, and put at the centre of the party's tax-cutting proposals. America's phasing out of estate tax, as part of George W. Bush, Jr’s 2001 tax package, has added a sense of momentum to reform. With Canada, Australia and New Zealand also having abolished it, Britain now feels unusual among developed English-speaking nations.

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