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Weekend reading: Should inheritance tax be 100%?

Weekend reading: Should inheritance tax be 100%? post image

What caught my eye this week.

Having made a case for higher inheritance taxes (IHT) in the past, I could have warned Abi Wilkinson to ask for danger money and a safe house when she wrote her piece for The Guardian this week.

Wilkinson writes:

Morally speaking, people who stand to inherit large sums haven’t done anything to earn that money.

An accident of birth placed them in a comparatively wealthy family and they’ve benefited from that their whole life.

This is the argument I make, too. People immediately start with straw man retorts – “Oh, so should rich children also not be allowed private tutors then?” or “Oh, so should rich children also be forced to live on Pot Noodles and never see a vegetable then?”

But I think that’s because in a world where we’ve decided to have a State and to fund that State with taxes, you have to go absurd pretty quickly to justify generous rates and reliefs for people who are (a) dead or (b) who did nothing to earn the money you are taxing.

These are taxes, remember, that rich kids not paying mean someone else has to pay. Maybe me or you? Maybe your kids, from their squeezed wages.

I understand – and was reminded by some of the nearly 2,000 comments on Wilkinson’s piece – that critics of inheritance tax (i.e. almost everyone) don’t see it that way.

They see 100% IHT as the State taking money from hard-working people who did the right thing and worked and saved all their lives and who are now being taxed twice. And they see the State giving it to indolent dossers via welfare and other benefits. (I paraphrase.)

Whereas I am full of admiration for people who work hard and save all their lives, but I see them as irrelevant once they’re dead. I see their children getting a freebie for doing absolutely nothing, on top of the other benefits having better-off parents gave them. And I see the victims not as the dead person in the grave, but rather the everyday people on minimum wages – or heck, the middle-class JAMs – who have to more tax on their incomes so that rich kids can get more money for free.

I’d tax inheritance at say 75% just because it’s the most moral tax. But I understand many of you feel differently.

Even my mum does – and I regularly urge her to spend the lot!

From Monevator

Five reasons why you’ll love index investing – Monevator

Do you have a money mind? – Monevator

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News

Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1

Report finds UK housing market still reeling a decade after the financial crisis – Guardian

Crackdown on (crazily) unfair leasehold practices confirmed – UK Gov

Santander cuts back lending amid Bank of England concerns over consumer debt – Guardian

The great rotation from bonds to stocks might finally be at hand – Bloomberg

Can you afford to live to 100? [Search result]FT

Products and services

Some tracker funds cost ten times more than rivals [Search result]FT

Charter Savings Bank’s new table-topping cash ISAs pay up to 2.15% – ThisIsMoney

LendInvest’s five-year bond pays 5.25% but definitely comes with risks – ThisIsMoney

‘Insta-bragging’ could invalidate your home insurance – Telegraph

Extra-long mortgages push up the age of borrowers [Search result]FT

Comment and opinion

Shame, status, and the American Dream – Bason Asset Management

Alan Shearer has much to teach us about inflation – The Value Perspective

Fund mismanagement – SexHealthMoneyDeath

What’s really putting the brakes on the UK housing market? [Search result]FT

Too much enthusiasm in the markets: Howard Marks’ latest memo – Oaktree Capital

Financially independent at 43 and roaming Europe in a motorhome – The Escape Artist

‘Disgusting and astonishing’: how do the UK’s top 1% view tax avoidance? – Guardian

The FTSE 100 has inched up towards fair value – UK Value Investor

Thought provoking interview with economist and Nobel laureate Myron Scholes – UBS

Why banks could prosper in the next stock market slump – Telegraph

Are solar funds paying 6% too good to be true? – Telegraph

The worst landlord horror story [US but interesting]Financial Samurai

Brexit

‘A bit of me is dying. But I can’t stay’: the EU nationals exiting Britain – Guardian

A British negotiator says Brexit will be far worse than anyone expects – Independent

Off our beat

Why interviewing prospective new employees is futile – Medium

And finally…

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{ 118 comments… add one and remember nothing here is personal advice }
  • 101 Marked August 1, 2017, 11:31 am

    @greenasgrass
    That’s so true about the 3rd generation effect. I see it now – I have two aquaintances where their father made a lot of money in oil, they are very thrifty and their offspring have rebelled and don’t understand the idea of wealth retention. For example one of their sons recently complained he wasn’t allowed to go First Class to the USA (11hour flight) instead of business class. When I go (not that I could afford business let alone first) I’m sure my luggage has more room than me!

    The percentage of people that make it past the 3rd generation as wealthy truly is small.
    There are tax planners that give advice on keeping the wealth, and having trusts, etc, but I always think the only winners in those schemes are the tax planners themselves as trusts seem to be fair game for fleecing by the state (meaning retrospectively too).

  • 102 Learner August 1, 2017, 4:29 pm

    I hadn’t thought about the dispersement of wealth across generations. Funny! Would be good to see real research on that.. How much goes to the local McLaren dealership, how much to dodgy overseas investments, bad business startups, etc. Not sure that much of it gets back to the state.

  • 103 cat793 August 1, 2017, 6:43 pm

    I agree with Christof, vanguardfan and zxspectrum48k. Surely the fairest and most practical approach is to treat all income the same whether it is earned, interest, dividends, capital gains or an inheritance.

    I also sympathise with AltanticSpan’s point. Some families might face particular situations where leaving money for offspring is a pressing priority (children who will need care or be constrained in their ability to earn a living).

    And that leads on to my final point which is that IHT is always going to be a very emotional subject because it is interfering with parents in their role in doing everything possible for the well-being of their children. It feels like an assault on the family. Especially at a time when society has become more dog eat dog. The UK seems to be becoming less homogeneous and cohesive every year. Support for universal parts of the welfare state such as the NHS and state pension is strong but support for redistributive welfare is weakening as rather than being a universal safety net it becomes more of a way of life for the underclass. Tax payers perceive the money that would have gone to their children as going to a bunch of people they have nothing in common with instead. A sustainable tax has to gain widespread acceptance from those to be taxed otherwise it lacks political legitimacy and cannot be sustained.

  • 104 marked August 1, 2017, 9:51 pm

    @cat793

    I like your last paragraph about sustainable tax and widespread acceptance. A case in point – the poll tax from the Thatcher era. It brought her down really.

  • 105 Andrew August 3, 2017, 2:43 pm

    Sterling work from Monevator as always making the economically sound case. Shame so many people continue to (intentionally?) confuse the “How should we tax?” question with the “How much should we tax?” one.

    Perhaps we advocates for higher IHT need to start laying this out in much more simple terms like “Reduce your children’s income tax rate by x% every year of their lives in exchange for Y% higher inheritance tax”?

    I’m one of the lucky ones who may one day (hopefully a long way off) inherit a significant amount. I also have children who I hope will survive me for many decades. Morally I think my and their inheritance should be 100% of everything over say £10k though those named in wills should have first dibs on buying sentimental items at a fair market price. Practically I fear this may be too difficult so I’d settle for the simple elegant solution of both inheritance and gifts being treated as income on your tax return and hence taxed at the marginal rate.

    As a first easy step there are huge loopholes in inheritance tax that should be closed. I don’t understand why adults in good health should ever be allowed to be beneficiaries of trusts for example.

  • 106 Twothirty August 5, 2017, 11:07 am

    Aside from the philosophical issues around this, the practical issue is that the most wealthy parents will find a way to avoid paying IHT and pass on their wealth, making it an even more unequal tax.

    On a philosophical point of view, I’m strongly against a punitive level of inheritance taxation.

  • 107 Mark Gahagan August 5, 2017, 1:15 pm

    @The Rhino
    Uk Libertarian Party: https://libertarianpartyuk.com
    In relation to some who believe that either a land value tax or even 100% inheritance tax (god forbid) would destroy land values. Well, it could be argued land values are drastically and artificially pumped up by the ludicrous amounts of fake money now pumped into all economic systems via fractional reserve banking (another Libertarian hate I am afraid to admit) and need to be allowed to find a fair value under a solid money system backed by gold (or anything not controlled by governments and/or banks).
    Solid money and a land value tax are the fairest system I can think of. Obviously it requires reduced public service (which is controversial I accept) but private business is pretty good at providing quality goods and services cheaper than any government can do.

  • 108 Mark Gahagan August 5, 2017, 1:17 pm

    sorry. Added this to wrong thread in error

  • 109 John Were August 6, 2017, 9:28 pm

    What about high inheritance tax that funds a global basic income? Fast way to fix inequality and everyone ultimately benefits.

  • 110 Tony August 7, 2017, 11:14 am

    Not sure if this has been covered, but if you are proposing 100% inheritance tax rate, are you advocating the winding up of all trusts used for protecting the family wealth?

  • 111 Hospitaller August 7, 2017, 3:10 pm

    @ John Were

    Doubt that everyone benefits; presumably the inheritors in fact lose out. Also unsure that equality is something that needs to be or can be “fixed”; inequality is probably as inherent as eating, drinking and breathing and may even be as important to the long-term survival of the species.

  • 112 max August 7, 2017, 3:16 pm

    ” inequality is probably as inherent as eating, drinking and breathing and may even be as important to the long-term survival of the species”.

    Amen. Don’t try and ‘fix it’ by theft!

  • 113 ja August 10, 2017, 7:08 pm

    1. First of all assumption that people inherit money they do not deserve is false.
    I can easily imagine child helping his parent run some business or build a house etc.
    Granted there are cases where people may inherit some wealth they do not deserve. But I would rather argue that prevailing case is children add to wealth of their parents.

    2. How do you know my children will spoil inherited wealth.
    It is very cheap assumption that inherited wealth will be spoiled.

    3. What is wrong with children spoiling inherited money?
    How is it better than me spoiling it first?

    4. 100% tax mean money will go to ‘government’.
    Are you sure government will make better use of my wealth. Are you sure government will make better use of small business I run. Are you sure government will actually make any use of my wealth (as not everything is money) except of selling it?

  • 114 Steve August 16, 2017, 4:32 pm

    I feel it is dangerous to make the case that having a high IHT is valid because beneficiaries have done nothing to earn the wind-fall. The same argument could be used against benefits claimants… making sure they have put into the system and earn their ‘handout’? Perhaps the motives of Santa Claus should be questioned (or taxed)… do the kids really deserve those free toys?

    I understand the feeling of unfairness that the passing of wealth through inheritance can bring but currently feels to me like tackling the wrong end of the problem. If someone wants to save all their life and pass it on to someone else they should be free to do so. Manage the way wealth is accumulated rather than distributed: there are plenty of tax loopholes to close before increasing IHT would seem fair to me. Such as… have capital gains tax apply on death just as it would have in life. If you follow Warren Buffet’s advice and never sell shares then neither you or your estate will ever pay capital gains tax (at least in the UK).

    I also think that adding upper limits on tax shelters, such as ISAs, would seem fair. I am in a position to take some advantage of the current rules, but can’t see the national good in being able to hide another £20k each year from the tax man… that’s a life’s savings for a lot of people.

    I find improving education, such as making it free for those who stay the course, and providing opportunity for all to climb to the top of the mountain is preferable to penalising those that got there before you.

  • 115 The Investor August 17, 2017, 8:41 am

    Hi Steve, thanks for your thoughtful comments.

    I feel though your last paragraph perhaps encapsulates the differences between those of us who are for IHT (and why) and those who are opposed:

    I find improving education, such as making it free for those who stay the course, and providing opportunity for all to climb to the top of the mountain is preferable to penalising those that got there before you.

    I agree with you about education. Together with free healthcare, I think it’s the most effective form of redistribution.

    But I can’t agree with your last sentence, because as I’ve said repeatedly IHT (in my personal view, which is only that) doesn’t penalize “those who got there before you”, it penalizes (for want of a better word) those who have done nothing at all to earn their money except be born to those who got there before you.

    Further, if *everyone* is climbing the mountain equally, then those being given hand-ups by their parents through massive cash windfalls are going to be permanently ahead and over the next ridge. That’s not a meritocracy, it’s feudalism.

    Perhaps this didn’t matter quite so much when property wasn’t so ruinously expensive and divisive, but pretty much all the 20-somethings I know in London — even those now who work in anything but elite end of financial services — have given up on owning a home unless their parents can transfer six-figures to them. To be sure that arises from a variety of issues, but the inequality perpetuated by permitting huge tax-free transfers is pretty evident. And this isn’t even triggered by death.

    I think those who have argued for all income, regardless of source, should be taxed at the recipients’ highest rate, may be on to something.

    Anyway, thanks again to you and all for a pretty good discussion on this! 🙂

  • 116 max August 17, 2017, 11:47 am

    I think a lot of people are forgetting that inheritance tax falls on wealth that has already been taxed. It’ s theft pure and simple whether it applies to the middle class or the super wealthy.

  • 117 PC August 17, 2017, 12:16 pm

    Except that wealth arising from your main residence has never been taxed at all – except for a small amount of council tax.

  • 118 Steve August 17, 2017, 12:40 pm

    Another one of those loopholes: that the nation does not benefit from increased personal property prices. Stamp duty is a sort of perverse tax aimed at the same thing but arguably from the wrong side: the buyer paying for the (increase in) value of the sellers’ property. Again, using IHT feels like a clumsy way to fix this.

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