Abolish inheritance tax – and make death a taxable event

I have written several pieces on inheritance tax (IHT) recently. You can read them here and here. The key point I am trying to make in bringing the subject up (over and over again) is that there is no need for a separate IHT.

Why? Because from the point of view of an heir, an inheritance is simply a lump of unearned income. So, why not just tax it as such – at the recipient’s marginal income tax rate. That way we would get rid of all sorts of loopholes (and the lifestyle misery they cause), make our system more equal, and best of all, take a huge step towards the simplification of our tax system.

Not everyone likes the idea, of course – a good many readers just think that no one should ever have to pay any tax of any kind on an inheritance. I can’t agree with that (read the articles again for my reasons).

But there has been one suggestion that has popped up a few times that I could accept as a possible alternative to my own ideas. Instead of abolishing IHT and making an inheritance subject to income tax, why not make death a taxable event for capital gains tax (CGT) purposes?

IHT and all its complications are still abolished, but capital gains tax is payable on all assets on death. This is roughly how it works in Canada, although there as I understand it, the principle residence still passes on tax-free.

Regular readers will know that I’d like to abolish stamp duty and put a CGT on primary homes as a way to make property taxation a tad more rational (see many earlier blogs on this).

If the endgame here is tax simplification (and why wouldn’t it be?), wouldn’t it be nice if we could abolish IHT and stamp duty at the same time and replace both with an extension of the CGT regime?

  • mr clyde

    I’m sure I said that?

  • Merryn

    @mrclyde You did! You were in fact the first to mention it. And i gather this is how it works in some other countries.

    • mr clyde

      Merryn – thank you for the acknowledgement.

      • mr clyde

        …however I was hardly the first. I think capital transfer tax was a Labour wheeze back in the seventies, however it was soon got rid of when the politico’s realised that they had accidentally invented a tax that their rich cronies couldn’t avoid!!

  • Angela

    The trouble with IHT is that it was invented to redistribute wealth from the the 1% to the rest of the economy, but today it is redistributing wealth from only the middle class back into the economy.
    A shrinking middle class is phenomenally dangerous to our nations economy. it is clear that IHT is a wealth destroying tax today, rather than a redistributive tax.
    The creation of new businesses and growing the nations overall wealth is the function of a healthy and prosperous middle class. It has to be permitted to accumulate wealth in order to do so, not continually taxed down to an average.

  • Midvaag

    I think you should have a Money Week poll about your idea. Keep it simple – “Do you support or oppose?”

  • NeutronWarp9

    It is a very narrow and woolly view to see IHT as (principally) a means to redistribute wealth from the middle class into the economy. You could argue the tax raised funds education to produce a larger middle class, etc, etc.
    Surely we want an educated, enterprising, innovative, open middle class – essentially a dynamic mass of people with the means and opportunity to aggrandise themselves – rather than inter-generational well-offs that are doing nicely because mummy and daddy left them cushty.
    As in Rome, without a larger gene pool, Angela, the middle class will inevitably decline. Or perhaps it’s too late?