Why inheritance tax should be scrapped

published 8 October 2007

This feature is part of our FREE daily Money Morning email. If you'd like to sign up, please click here: sign up for Money Morning.

We never thought wed see the day, but we find ourselves in agreement with something that Stephen Byers had said.

The former Cabinet Minister, who even by the demanding standards of MPs has the ability to make everything he touches turn to disaster, called for the abolition of inheritance tax at the weekend.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Of course Mr Byers' move was a cynical attempt to annoy Gordon Brown, almost certainly sanctioned by Tony Blair.

But as cynical ideas go, it was a good one...

It goes without saying that the Labour party faithful were up in arms about Stephen Byers' attack on inheritance tax, which he described as a "penalty on hard work, thrift and enterprise." And there were plenty of opponents in the press as well.

Peter Oborne wrote in the London Evening Standard that Mr Byers's proposal was "crazy", and a license for "rich, young, Notting Hill trustafarians" to sit around, "generally doing nothing worthwhile at all", when it would be better "if they were obliged, like the rest of us, to go out and do an honest day's work."

This is tripe. For one thing, if the most pressing social problem that Londoners had to worry about was the abundance of unemployed rich people roaming its streets, then the city would be a far more pleasant place in which to live.

But more importantly, this view of inheritance tax (IHT) as a tax on the spoilt and idle rich is nonsense. It's straightforward class war' propaganda designed to defend an otherwise indefensible tax which takes advantage of people when they are at their most vulnerable.

For those who don't know, here's how IHT works. When you die, the Government gets a whopping 40% of all your assets and cash over and above the IHT threshold, which is currently £285,000. The only heir exempt from the tax is your spouse - they can inherit any amount without paying tax. But of course, this just delays the problem rather than solving it.

In the past, people haven't taken IHT very seriously. It was once described by former Labour chancellor Roy Jenkins as "a voluntary levy paid by those distrust their heirs more than they dislike the Inland Revenue." This was a view echoed by tax advisors, who could find various fairly straightforward ways to avoid the tax, as long as you made a will and planned ahead.

This might explain the general level of complacency that has built up, despite the fact that IHT, courtesy of Gordon Brown, is now nigh-on impossible to avoid - except of course, for the super-rich it is ostensibly meant to target.

Mr Brown has closed almost all the loopholes that might allow people to easily avoid paying IHT. This comes at a time when many families, particularly in the South East and London, own homes worth well over £285,000, simply as a result of the housing bubble. Unfortunately for many of these people, their house is their most significant asset. This can result in the forced sale of the house after they die, in order to pay their death tax bill.

The number of estates paying IHT rose by more than 70% in the five years to 2003/04. Estates valued at less than £500,000 accounted for 71% of those - hardly the super-rich. The tax take from IHT has nearly doubled since Labour came to power, rising from £1.7bn in 1996/97 to £3.3bn in the 2005/06 tax year.

Apart from proving that the only ones who really benefit from the housing bubble are the Government (if you would like to read more on why soaring house prices are making us all poorer , click here: Why housing wealth is an illusion), these figures also show that the real victims of IHT are ordinary families - not Lord and Lady Muck, as the Labour backbenchers would have us believe.

On the other hand, the Notting Hill trustafarians that so irritate Peter Oborne are unlikely to be battered by the tax. Their parents can afford to pay for the complicated tax advisors now needed to get around Mr Brown's new rules. And of course, the super-rich can simply relocate, picking and choosing their citizenship to find the most favourable tax regime - which is of course, an eminently sensible thing to do.

IHT in its original form was first introduced in 1694 as a tax to finance a war on the French. Like all taxes, the Government of the time said it was a temporary measure. And, like all taxes, it has existed ever since and is now being applied to a wider and wider group of people, until the Government now believes that it has a right to the money.

Gordon Brown, via his team at the Treasury, responded to Mr Byers saying: "Anyone who wants to abolish it [IHT] needs to explain how they would plug the £3.3bn cost." The use of the word cost' here just gives an insight into Mr Browns mindset. It's as if that £3.3bn belongs to the Treasury - the suggestion is that to cut the tax take would be some form of theft from the Government.

But it's not the Government's money - it's ours. So here's a radical suggestion Gordon - how about we don't plug the cost? How about you stop wasting so much of our money instead? We could start with the tax credits system, and then work our way through the list of pointless public sector jobs that have been added to the Government payroll in a massive attempt to redistribute wealth and mop up some of the otherwise unemployable products of our education system off the streets.

Maybe Mr Byers could make that his next suggestion to the party faithful.

Turning to the stock markets

In London, the FTSE 100 closed 11 points higher at 5,915 yesterday, despite a weak start on Wall Street, as miners and oil companies performed well on a day of subdued trading. Anglo-American made the biggest gains of the day, after the Observer reported that it was the target of an $80bn bid. Kazakhmys, Rio Tinto and BHP Billiton were also higher. Marketing and advertising company WPP was one of the day's biggest losers, despite reporting a 30% hike in profits last week, as investors expressed concern over its growth prospects. For a full market report, see: London market close

Elsewhere in Europe, the Paris CAC-40 closed 31 points lower at 5,104. Analysts said that tensions in the Middle East and the uncertain outlook for US economic growth had weighed on sentiment. In Frankfurt, the Dax-30 was also lower, down 22 points to 5,794.

Across the Atlantic, US stocks ended their five-day run of gains. Disappointing results from DIY firm Lowe's Cos had fuelled concerns over slowing growth, whilst the oil price rose again on heightened tension between Iran and the West. The Dow Jones Industrial Average fell 36 points to 11,345. The Nasdaq was down 16 points to 2,147 and the S&P 500 fell 4 points to end the day at 1,297.

In Asia, the Nikkei climbed 212 points to close at a three-month high of 16,181 this morning.

Crude oil reached a four-day high of $72.45 a barrel in New York last night, as Iran continued to defy calls from the West that it cease its uranium enrichment programme. Crude was down slightly this morning, trading at $72.36, whilst Brent spot was at $72.83 a barrel.

The higher oil price saw spot gold climb 2% last night. It was trading at $627.90 this morning. Silver also edged higher, to $12.33 an ounce.

And in London today, Holiday Inn owner Intercontinental Hotels announced that Q2 profits had doubled as a result of asset sales and a strategy of managing and franchising hotels, rather than owning them. In other news, homebuilder Persimmon reported a first-half profit increase of 9.9%, prompted by higher selling prices and its takeover of Westbury. The announcement saw shares in Persimmon rise by as much as 29p in pre-open trading this morning.

And our two recommended articles for today...

Look to a very liquid investment

- As Asia industrialises fast and the global population grows, fresh water will be in ever-increasing demand, says MoneyWeek editor Merryn Somerset-Webb. So now is the time to look for investments in countries with an abundance of this important resource. And one not only has vast reserves of fresh water, but oil, gold and timber too. To find out which resource-rich country you should be looking at now, read: Look to a very liquid investment

Why you must buy gold - or, even better, silver - now

-Many investors believe that gold is a hedge against inflation. That may be true, says Porter Stansberry of The Daily Wealth, but there is another secret to gold. To find out why it is important that you have gold and silver in your portfolio now, see: Why you must buy gold - or, even better, silver - now

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.