Good reads from around the Web.
Does the Government read Monevator: Part 4,643… According to The Guardian, the inheritance tax changes that are expected to be announced in this week’s budget have been revised.
Now, long-term sufferers readers may recall I am all for higher inheritance taxes.
I do appreciate though that I might as well believe in the redistributive powers of the Tooth Fairy, given how the tide of opinion is against taking money off dead people instead of taxing living ones who are, you know, doing useful work, building businesses, and so on.
But even leaving that aside, as I recently ranted the proposed changes to inheritance taxes to exempt the family home were foolish because of the damage they could do to the already broken property market:
…to take an asset – UK housing – that is in structurally short supply, where high prices cause daily misery for millions, and to make it even more attractive to sit in it, unproductively squatting for future gains – that is downright irresponsible.
What moderately wealthy empty-nesters living in a capacious four-bedroom house are going to downsize now, knowing that all it will do is expose the money they release to inheritance tax?
On the contrary, they will be advised to consider buying even bigger and more expensive homes to try to shield their (children’s) assets.
Mass downsizing alone won’t solve the housing crisis, but it would be a start.
Well, it seems that while Government wonks were a little slow not to think of this before, they may have come to their senses.
The Guardian reports:
It is understood the plans have now been amended to allow pensioners to move into smaller homes without missing out on the £1m relief on their former properties.
A new mechanism will mean that if someone sells their main residence and buys one that is cheaper, they will get the allowance up to the value of their previous home.
Of course, much as I jest that this blog is influencing government policy, I’m aware I wasn’t the only person who quickly appreciated the lunacy of the first plan.
So now – assuming the plan really has been reworked – let’s get thinking about the flaws of the new approach…
In the meantime, enjoy the heatwave, and make sure you carry a bottle of water with you when perusing any of these articles.
From the blogs
Making good use of the things that we find…
Passive investing
- Never fear the bogeyman – The Kirk Report
- Asset allocation and your human capital – EightAteEight
- The joy of portfolio boredom – Alpha Baskets
- Most US assets and bonds are having a tough 2015 – Capital Spectator
Active investing
- Value investor Tom Gayner of Markel talks at Google – YouTube
- 15 problems with real world (versus paper) portfolios – AWOCS
- Debating the risk-free rate – Abnormal Returns
- Evaluating eBay post-PayPal – Microfundy
- Rethinking ETFs for income – DIY Income Investor
Greece mini-special
- Some stuff you should know about Greece – Reformed Broker
- Greece: The multi-year train wreck – Investing Caffeine
- A live blog of the Greek crisis – Telegraph
- Two Greek ETFs for those who like a flutter – Telegraph
Other articles
- Good advice, or advice that sounds good? [Old but strong] – Jason Zweig
- If you wouldn’t buy it, you should probably sell it – Mr Money Mustache
- The £90 swimming pool – The Escape Artist
- Value averaging versus your mortgage – the FIREstarter
- Against secular stagnation – Bank Underground [The BOE’s blog]
Bung of the week: Psst, want to buy an electric car? Hurry up, warns The Guardian, as the £5,000 grant scheme is nearing its end point.
Mainstream media money
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 of that site.1
Passive investing
- Larry Swedroe: Passive is best in emerging markets, too – ETF.com
- Allan Roth: The case for a gambling side portfolio – AARP
- The technology tracker that’s beaten all fund managers – Telegraph
Active investing
- Traders’ hormones increase risky behaviour – BBC
- Rare earth metals: Not so rare – Bloomberg
- Jim Slater: My seven rules for portfolio success – Telegraph
- Henry Dixon: Some out-of-favour share ideas – Telegraph
Other stuff worth reading
- Living the dream in your self-build home [Search result] – FT
- Big survey of pension firms’ charges for withdrawals – ThisIsMoney
- How not to be misled by data – WSJ
- A world without work – The Atlantic
- French ‘viager’ sell-to-stay home deals – BBC
- How Uber is muscling through US cities – Bloomberg
Book of the week: I just finished Ashlee Vance’s biography of Elon Musk
Like these links? Subscribe to get them every week!
- Note some FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]
My own IHT policy: close all the loopholes, reduce the nil rate band to £50k, reduce the tax rate to 10%.
£90 pool: we had a river. And a garden hose.
Thanks for the Uber link – a particular bete noir of mine. All that money spent on lobbying – so much for a good service speaking for itself 🙂
I tend to go with the “inheritance should be taxed as income” line of thinking. It’s nice and simple and tends to stop this sort of endless tweaking to make various lobby groups happy. Will never happen though, of course.
I guess some pensioners outside London/SE could end up using other assets to purchase a larger home which could later be passed on to children IHT-free.
First query / potential problem on the IHT change: how will it deal with house price inflation subsequent to downsizing having taken place? E.g. if someone downsizes from a £700k house and dies 10 years later, by which time the house she moved out of is worth £1m, presumably her heirs would only benefit from £700k of primary residence IHT relief and not £1m? (I’m assuming that the less expensive small house she moved to didn’t rise in value by anything like as much as £300k). If so there’s still an incentive to stay in the big house.
Some fascinating articles there, TI, thank-you.
IHT exploits people’s difficulties with addressing their own mortality. It’s pretty nasty in that regard — a bit like selling high-cost investment funds to widows or putting gambling machines in pubs. Smart rich people can dodge it with ease if they are switched on, while others are both dead and denied the ability to pass on their wealth to future generations.
It turns the positive attributes of reducing expenditure, to saving, investing sensibly into a guessing game about how early you can become unproductive in society. Why do well at this if all it does is fund a few more civil servants to be on long-term sick for a bit longer, rather than to help fund the objectives which you yourself choose (which may be funding offspring, but might also be a range of other things).
If you think IHT is a good idea, then why not have a simple wealth tax on the living? Presumably because the living vote and the dead don’t.
Really liked the FIREstarter’s article on mortgage vs no-mortgage and I’m a massive fan of Uber. Anything that breaks up cartels is good for me as a consumer. I’m happy for them to grow rich on it (and attract competition and be further regulated in due course).
Finally, I’ve guffed on previously in comments about ERNS being an interesting place to park value while waiting for equities to get cheap: short term, investment grade bonds with a terrible returns but good security. I previously measured the liquidity by looking at spread in terms of days of net expected return. That was just a few basis points when I looked last week. Imagine my surprise then when equities got suddenly cheap this week and the spread opened up to 500 bp on Monday, retracting to 150 on Tuesday and then finally settling over the week. For me the liquidity issue in bonds was made very clear by example and I have dumped the holding: it didn’t do it’s job. For me a sobering lesson in liquidity (spread) cost rather than the usual focus on TERs: there’s more than one sort of cost to keep low. A lesson bought is worth two taught….I hope that might be useful to someone else with them having to buy the lesson too.
@Mathmo
“If you think IHT is a good idea, then why not have a simple wealth tax on the living? Presumably because the living vote and the dead don’t.”
IHT is a wealth tax on the living, duh
One is that already too low in IMHO
Raising it by increasing taxes on high earners is morally repugnant
Inheritors generally did little but suck up and emerge from the right hole
@neverland – I don’t want to provoke any bad-tempered back and forth; I generally think the standard of debate here is admirably polite — so perhaps we can look at this beyond “duh”. IHT is paid by the estate which is a form of trust for the dead person, the net proceeds of which are distributed to the beneficiaries. Although I agree that it feels a little like semantics whether it’s a tax on the living or the dead as the dead can’t own or spend, but it’s certainly a one off (very few people die more than once…). A wealth tax, for Piketty fans, would be an annual drag on wealth accumulation for all (living) owners of capital.
I suppose my biggest objection to IHT is how unfair it is being pretty much optional for the truly wealthy and catching a lot of middle net value people unawares. It feels a touch underhand (like the separation of NI from Income Tax), so in effect, it truly allows the top 1% to separate further from the pack and it doesn’t really raise much revenue — about enough to keep the government going for less than 48 hours.
Outside of practical considerations, perspectives on IHT do come down to moral viewpoints. I think this distils to whether the principal of ownership is more important that the principal of moral wealth. That is to say: is it more important that the rule of law establishes absolute property rights or that we can point at someone and say because they don’t “deserve” their wealth, we may confiscate it. The answer is in the middle ground, but both are dangerous in their extremes. I suspect our preferences are at different points of the spectrum.
Re: Uber, I like it too. I liked black cabs too and used to consider them one of the few luxuries that reliably delivered — but that’s the rub, luxuries! But anyway I thought the Uber story was an interesting behind the scenes look, however you feel about them.
Re: Inheritance tax, I think its opponents are almost wilfully deaf to what it’s supporters are saying. Or perhaps as has been argued before parents self identify so much with their children that they just can’t distinguish the boundaries? 🙂
i.e. The reason I am for inheritance tax and not a wealth tax on the living is because IHT is on the DEAD and the recipients did nothing to earn it, and likely had a whole bunch of other advantages beforehand, too.
We are not all born with equal chances, not by a long shot. And it’s getting worse. For various reasons including pragmatic ones I’m not one of those old fashioned socialists who’d close public schools, ban private health care, etc etc. Parents want the best for their children, and it’s likely best for society to harness it. And 3 kids going through an elite public school with a life of tennis lessons, piano tutoring, skiing holidays and whatnot is likely better too than money spent on cocaine on a private yacht.
You might say “people are free to spend money how they like” and I agree that’s a fine goal but the reality is we favour some forms over others through tax and law and more importantly we have a state that needs funding from somewhere.
So where I draw the line is “wealth cascading through the generations”. I explicitly DON’T want people to “pass on their wealth to future generations”. The consequences are against my personal idea of a meritocracy and social justice.
One might say: “fine but those are your views you’re trying to force on the rest of us”. Of course that’s true but it’s specious — so is the status quo forced on me. I don’t get to opt out of higher rate taxes etc.
It’s often been argued here that IHT is not collectible. I have my doubts but anyway that’s not an argument against the concept of IHT, only that collecting it is a more difficult issue to solve.
Finally, again, why would it follow that I want a wealth tax on the living? That’s totally different in my view.
To paraphrase and adapt Mandelson’s famous comment, I am pretty intensely relaxed about people making their own money, even quite a lot.
But I see no reason why that means I should be relaxed about people being simply given it, especially given the ongoing social consequences, while the State is taking from those engaged in actually working and otherwise earning it.
In short, I’m perfectly fine with Branson or Charles Dunston being mega rich. I’m not thrilled about mediocre CEOs earning outlandish salaries, but that’s mainly because I think they’re not worth it and that as a group they’re (unwittingly) gaming the system. Rich professionals, skilled/canny freelancers, sports stars, fair enough.
In contrast I’ve watched many friends for example buy houses they could never have bought without sometimes very substantial windfalls or assistance. That has a consequence — it means the people renting next door who are doing very professionally but who weren’t fluky enough to be born to the right parents are structurally disadvantaged, despite their equal or superior achievements and contribution.
Spread that across the whole life cycle and I start thinking my previous IHT olive branch of 90% was too timid. 100% and let’s tax gifts over four figures too!
Yes, I am a peculiar person to be writing a blog about money in the current climate, I understand that. 🙂
Finally, glad you liked the links Mathmo — always cheers me to read nice words like that, as it can be a slog some Saturday mornings… 🙂
@Mathmo — Our comments crossed. But I’ll just add again, re deserving and confiscation, the status quo does that too. The State confiscates at least 40% of my earnings above a relatively low threshold, and more via sales taxes etc. So I feel that’s a red herring.
The State chooses and confiscates: No system is perfect but favouring those who’ve done nothing to earn their money is especially imperfect, in my view. 🙂
We’re probably not going to agree on this one, which is fine. Isn’t it a lovely world where we think about stuff and disagree nicely and perhaps understand a little more how we think?
The current lot do appear to agree more with my stated view (so I’m alright, Jack), but I do generally quite dislike large changes to these decade-long systems. For example, I’m extremely worried whenever governments tinker with pension rules. How long before the ISA lifetime allowance? How long before pensions are partially taxed either on contribution or as a wealth tax? I think changing the rules on people who bother to plan and save for their futures is most unfair and ultimately will dissuade people from the habit. If we are to confiscate for moral reasons then lets make those clear well in advance, rather than dipping our hands into the pockets of whichever group we happen to feel like fleecing this year.
I agree it’s a terrible thing that you are taxed at 40% on earnings — even higher if those are the result of having a job (12-25%NI on top) and another 20% on your expenditure. This huge fiscal drag is one of the biggest reasons that Moustachism works so well. Cutting investment costs and compounding returns comes a distant second to this wealth-eating monster.
Let me reaffirm that I do look forward to the week’s links on a Saturday (when do you ever take a holiday?!) and really do appreciate the work you put into assembling them, and the thoughts and debate they provoke. Thank-you.
I love the way that people rant about the sheer inequity of inherited wealth, while they enjoy first world standards of living because they inherited citizenship in the first world.
If inheritance is eeevil, why not bugger off to Burma, boys?
@dearieme — Very tempted to delete your comment, but will leave it stand as I think it’s so ridiculous that’s a worse punishment. 🙂
@mathmo — Indeed, I am very used to being in a minority on this one. 🙂 Thanks for the thoughts.
Because of the figures involved the practicalities of IHT have never really challenged my thinking – at current rates (even before the changes that are expected to be made this week) what we leave will not come within scope, and neither myself or my husband inherited (or will inherit) anything more than very modest 4 figure sums.
But, taking what you say to the logical conclusion where all assets would be taxed on death and, especially taking into consideration your suggestion that gifts be taxed, has made me think about the principles involved. As a parent this is quite an uncomfortable exercise because I totally agree with your comments regarding the injustice of unearned wealth cascading down the generations.
If we really did live in a meritocracy (or if that were even possible – your idea of “merit” may well be quite different to mine 🙂 and those CEOs are proof that things just don’t find their own level in this) then perhaps trusting that your children will be able to make their own way in the world would be a whole lot easier. As it is helping them (but just a very, very little) along the way is perhaps something that is still consistent with social justice? I’m not sure. Thanks for making me think. 🙂
It’s actually one of the few comments from Dearieme that I’ve found myself agreeing with! Speaking as a white male, born in the West, I know that I’m playing the game of life on one of its easiest settings.
If someone is planning on confiscating my income and assets, I’d much rather they go overseas to reduce this inequality rather than just being used to cover the UK benefits bill.
How can a challenge to rampant hypocrisy be “ridiculous”? In what way is it “ridiculous”? Do you plan to deny your own offspring all their inherited advantages in the first world? Indeed, their inherited advantages also of intelligence, beauty, good health, a sunny disposition, or whatever else they have inherited? Well, do you, punk? ‘course you don’t.
Oh dear, the specious old “you don’t have any right to make a nuanced comment on the various problems caused by inherited inequality and relative poverty within the UK unless you’ve given every penny you have to starving Somalians and are currently living in a cardboard box” argument is really out in force….
A few numbers from a FIRE perspective: a tiny part of the advantage of being born in the UK is the right to claim a State pension after clocking up 7k a year of pay for 35 years — a low hurdle, which even someone as lazy as myself should manage. That grants you an income of £7,865 — which in a world of 4% swr/annuity rates is worth £200,000.
Not a bad birthday present from the state.
I don’t have the figures available for Burma.
IHT is simply another tax. Whilst I am not an anarchist, I do feel the role of the state should be diminished, and that doing this will improve the lives of all. From both a moral and a utilitarian perspective, spoilt Johnny wasting the family inheritance is better than confiscating private wealth to spend on the whims of the most recently elected government.
Nevertheless, I don’t think the wealth tied up in the family home should be put on a pedestal. Being old is expensive. We should all be responsible for our own retirement, and using the wealth tied up in our assets is how we should fund it. Think of selling the family home as being in the de-accumulation phase of your life. IHT should be abolished, but so should protection of the family home from means testing.
Also, put a land tax on it (I know, best worst option for tax from an avowed libertarian) so that Johnny has to generate income from his inheritance, or see that inheritance dwindle. Land is scarce and we can only create more of it at great expense. Encouraging economic and efficient use of scarce resources through a land tax is a rational and reasonable aim to have, without the confiscatory aspect of IHT.
Telling people who argue the case for a change in the level of inheritance tax to move to Burma is ridiculous because it is a logical fallacy.
If I was 12 years old and this was my first Internet discussion, I might fall for it. But neither is true.
Even taking the ridiculous statement on its own terms, it doesn’t make any sense. One of the rights I have inherited through being born a UK citizen is the democratic right to argue and vote for changes in the status quo, including taxation. Exercising that right does not imply I should renounce my citizenship.
Throughout history, the level of inheritance taxes has varied. Did people variously have to emigrate to Burma when it was uncovered that they were drafting up the legislation or putting it in their manifestos?
No, of course not, that would be silly. Not to say ridiculous.
As to your second comment, I specifically implied in my reply to Mathmo that I understand there are a range of inherited benefits that we all enjoy, and that I currently believe that it would do more harm than good to intervene with many/most of them.
However it seems to my way of thinking that a person dying is a convenient and fairly easily defined point at which to say enough is enough, to avoid the clearly resultant inequalities becoming more entrenched in our system.
Now my own moment to de-Spock myself and be a fallible human being with emotions… For the past few years Dearieme my satisfaction at posting a new article on Monevator has been slightly marred by knowing that within a short time I’d have to read and then decide on the fate of one of your Grumpy Old Man style six-word quips that inevitably pop-up like teenage acne in short order under each one.
I’ve even had to delete some of them because — almost uniquely, even among the trolls who have occasionally blighted this site — you sometimes feel the need to be abusive in them, rarely towards me but often towards the writers of sites I link to or to other comment writers, although perhaps you don’t see it that way.
To now find you using the “if you don’t like it, go to foreign land” line of attack is pretty much the last straw.
It confirms my long-held suspicion that you’d be better much off sharing your thoughts on ill-tempered comment threads on The Telegraph, or perhaps riling the lefties on The Guardian, and saving us both the bother.
Your comments have never added anything to the discussion here to my mind, and I personally have learned nothing from you. I’d be shocked if anyone else has.
So if you would like to save yourself the six seconds it presumably takes to come up with your lumpen bon mots and refrain from posting them, then that’d save me the two seconds I have to devote to deciding on their fate. Cheers.
@everyone else — I fully understand that IHT is a divisive issue on which reasonable minds can disagree. (Obviously my view is correct, but if you still don’t see it that way then perhaps it’s my fault for inadequately explaining myself. 😉 )
I think it was The Accumulator or maybe ermine from the Simple Living in Suffolk blog who first suggested to me that people’s deep resentment of inheritance tax came through their inability or unwillingness to understand their own mortality.
At the time I dismissed it and thought it was more likely due to atavistic parental instincts, but I have to say I do have my doubts whenever I read people saying “I don’t want to be taxed twice” or pretty much anything else with “I” in it.
Let’s try again.
You will be dead.
Let me be more lurid, on account of the above theory that people can’t or won’t think on it — you will either be ashes in an urn or else you’ll be in a wooden box, with worms eating your thighs and finger tips and your eyes congealing like overcooked mussels and dissolving to nothing, and then the box eventually either caving in on your scant remains or being moved elsewhere in 100 years hence to make way for a new housing development.
If you’re religious then you won’t need your wealth where you’re going*.
And if you’re not then you really won’t.
So you will be taxed on your wealth on death, but at that point you will be dead — and honestly, you really won’t feel a thing.
But of course the people being deprived of your wealth are not you, but your heirs. They will indeed have some wealth ‘confiscated’ from them — wealth they didn’t have otherwise.
Taking this money is what we call “tax”.
There seems to be some deep point of disagreement about the nature of income taxes versus inheritance taxes. People seem to prefer the term “confiscation” when it comes to IHT, and something else when it comes to taxes on income or profits.
But it’s exactly the same thing. Either way the State is taking money from someone, for its own ends or for redistribution.
The big difference of course is with income taxes, is you’re taxing somebody generating their own money, providing goods and services to others in the majority of cases.
Whereas with IHT you are taxing someone who has done nothing at all to get it and contributed zilch to get that wealth.
To that end, I can somewhat understand why people who have worked under PAYE all their lives might get confused, but I am surprised at you taking this line @gadgetmind (not surprised that you don’t like IHT — most don’t, I know — but that you consider it some special form of “confiscation”).
If I recall correctly, you’re a company owner. That means you accumulate profits all year. And then at the end of the financial year, the State confiscates an arbitrary level of your profits (arbitrary in the sense that it could be higher or lower by will of the government/the people, brandishing the rights that @dearieme wishes to confer selectively to those who he agrees with).
So that ‘confiscation’ happens to you every year. Again, the difference is your company has been providing goods/services so useful that people have paid you enough to generate a profit, which you are then partly unburdened of.
As opposed to your heirs, who have simply managed to be born to you and not to be dead yet.
Incidentally, it may amuse/perplex some of my critics here to know that I regularly argue among my friends that corporation tax should be 0%. Why punish companies that are providing what the public wants, and so curb their ability to make more of those goods and services?
Again, the argument seems irrefutable to me, but obviously most of you see it differently. 🙂
I repeat: We have a state and taxes are taxes. What we’re debating is where they are collected from, and to what end. I am not a fan of an endlessly escalating State or benefits bill or whatnot, as will be obvious to those who’ve read other posts of mine over the years.
If we want to say there should be a smaller State and thus lower taxes, fine, but that’s different discussion.
Finally, thanks to all those who have made sensible contributions to this discussion.
*Or perhaps we should fill our graves with flatscreen televisions and sports cars and tickets to Glastonbury to take to the afterlife, like modern pagans? I’m of course not serious — just to show I can do the reductio ad absurdum arguments too. 🙂 It’s not very constructive, is it?
Great to see such lively discussion on IHT. Well done The Investor.
Wish more threads were so animated,
1. An individual has two choices. He can either be a feckless spendthrift or a prudent accumulator. Choice one means no capital subject to IHT. Should we encourage choice 1?
2. The accumulator’s capital in many instances is from accumulated hard earned income, and has therefore been taxed once already. Will be noted that this is not unique to IHT.
3. Ultimately, who does the money belong to? The state or the family? Should the state rather than the family decide? This is rather like the two foxes and the single chicken deciding what is on the menu for dinner.
4. Those with borderline disabled offspring who may struggle in this cut-throat world, and for whom the parents have frugally struggled to accumulate funds are put at a terrible disadvantage by the state taking control of the funds.
5. Piketty’s tome was extremely persuasive, if the spreadsheet data a little erratic. There is an issue here in that capital begets more capital thus widening inequality. But there is research that indicates family capital rarely gets beyond generation 3, before being squandered. That might provide some consolation to the working class such as Magneto
6. What do we do about inequality. The main inequality as already observed is between nations, and we see almost everday the distress this causes with economic and other migrants seeking sanctuary in Europe and Australia. Surely we can do more to help these nations?
7. On the domestic front we could lift income tax bands, and increase the rates, thus taking more from higher earners and less from the lower paid.
8. A wealth tax would only see the rich hiding assets in real assets such as jewelry.
9. We could as I think The Investor suggested earlier, abolish interest relief on buy-to-let mortgages, popping the housing bubble, and thus giving at last an equal opportunity to first time buyers.
10. The impending proposals relating to houses and IHT are as pointed out, going to do nothing to solve the madness of the UK housing market, and seem destined to make matters worse.
What a great selection of articles this week. I’ve been somewhat worried about the Greek crisis but I’m going to stick to my asset allocation and ride it out. I did then think about increasing my European exposure and looking at the two Greek ETF’s in The Telegraph i’m getting giddy.
Must stick to plan.
As for IHT, I just think you are lucky if you get any inheritance. I left home when I was 18 and apart from child benefit (legitimately claimed for my kids) have done no sponging off the state or Bank of Mum and Dad. People should be proud to have broad enough shoulders to pay their fare share in society. I am damn proud of paying 40% tax! (although I do strategically try and minimise this)
Those who do get a large windfall, I wish them the best of luck as “ergodicity” will see them right
http://earlyretirementextreme.com/alternative-histories.html
Anecdotally, most people I know who have received large windfalls hand large chunks straight back to the treasury in the form of VAT buying overpriced “luxury goods”.
TI — I enjoy your counter-arguments greatly. And I agree that fear of facing mortality is one of the reasons why people don’t *do* something about IHT. (As an aside, it’s best to limit the situations in which you remind people of their mortality: I’ve found that retorting to it in an argument over space in a crowded rush-hour Tube doesn’t brighten anyone’s day)
But I’ve thought about it and I’d like to live forever, TI. I know I will struggle, in practice, but I get to raise my two fingers at mortality in one last final gesture by deciding where the remains of my fortune go and perhaps extending my influence a little further beyond the grave. That’s why I have a Will. It’s my choice about what ripples are left. It’s not just the worms that I’d like to feed.
So the tax is definitely on my legacy. It diminishes my ability to continue my influence on the world after my death, and while I won’t know it then, I certainly know it now. Some of those aims might be charitable and achieved by making a donation to the charity I run or other institutions which take value out of the taxable estate, but others might not. Not all of the things that I’d like to achieve can be done through a charity. Perhaps the soundest way to make my footprint last is to send off some mini-mes (whether genetically related or merely like-minded) with as good a set of values as I can and more resources and more time to influence the world than I had left at the end. Far from being the undeserving feckless heirs, the testator might see them as the last lifeboat of his dreams.
Death is a shortener of time-horizons and we all know that compound interest really makes a difference. Why should I limit my ambitions to do good in the world to the pathetically short time that I am alive?
PS – you are of course quite right to point out the attempt to colour the argument by the use of “confiscation”. It if helps, I think of income taxes as being money demanded with menaces from the monopoly provider of legitimate violence.
People do hate IHT don’t they. Effectively feeling that it is unfair that the tax man takes all their hard earned cash leaving their starving widows and orphans destitute….
Except that under the current rules, if a couple have assets worth £600,000, there is no IHT to pay. If a couple have assets worth £1m, their family would be left with £860,000, and the tax man gets £210,000. Any funds saved in pensions (which have not been saved out of taxed income and may even have avoided NIC) will not have to bear much tax depending on age at death. And tax does have to be collected from somewhere… IHT is a relatively painless way of doing this.
Why just housing? to misquote Cameron and Osborne “It can only be right that when you’ve worked hard to build up a large share portfolio, it will go to your family and not the taxman.”
In terms of the actual reforms, I object to the needless complication of treating assets of different classes differently when there isn’t really any justification, and when it will have a distorting effect on behaviour. If we have to add to that the extra layers of complication to protect the value of assets derived from property, for something that will benefit relatively few people, and that it is paid for by adding yet more complication to the pensions tax relief system, which doesn’t need any more complexity, the whole proposal is clearly nuts.
On practical point: a couple’s assets consist of a house worth £800,000, cash/shares worth £200,000, and a pension pot of £500,000, and they sell the house to buy a smaller one worth £400,000. On the last death 15 year later the house is worth £600,000, the pension pot £300,000 and the cash/shares £300,000. How do we track how much of the cash/ shares derives from the original house sale and is therefore presumably exempt from IHT? What kind of records will have to be kept?
Also why say that it is unfair to take tax from a hard earned house but then say that principle doesn’t apply if the house is worth more than £2.3 m (which I gather may be part of the plan)? 2 equally “hard working” couples might have paid the same price for their home 40 years ago, but one is in an area which has appreciated more, so is worth just over £2.35m, while the other is still under £2m
What we need is a root and branch simplification. What we are going to get is endless more tinkering
@TI, I’m in agreement that the tax system is particularly perverse in this respect. Janan Ganesh has an interesting take on this in the FT today. His point is that the tax system implicitly attaches morality to different actions. The current system incentivises (and hence endorses) a) being lucky enough to have rich parents/grandparents b) making a killing in the property market c) hard work, in exactly that order. A more sensible system would reverse that order of incentives.
@Mathmo, politics is always about difficult choices. Without being too grandiose, the question here is at least in part about what sort of society we want to live in. Some people’s desire to keep a larger share of what they earn through hard work needs to be balanced against others desire to cause ripples down the ages. Personally I’m with the Investor in wanting a society where I can earn my way up the ladder more easily despite personally being lucky enough to potentially gain from the proposed changes in tomorrow’s budget.
IHT is less popular amongst the middle class than the uber wealthy, and it is not hard to see why. The middle class see family wealth as an opportunity to give their immediate offspring and grandchildren an advantage a boost in life, to lock in the hard work they have put in to secure their family’s wellbeing.
The uber wealthy have options to protect their wealth and boost their family’s opportunities during their own lifetime. Their children have been to the best universities, have used their windfall family connections to do well in business, are basically set no matter what they inherit in monetary terms.
IHT disproportionately impacts on middle class wealth accumulators ability to protect their family’s future prospects against the travails of an uncertain world. That is a pretty basic human desire, and one that our tax system should protect.
Dead people can’t protest about IHT, but they sure can decide to work less hard, fritter away their hard earned or relocate to tax friendly locales *before* they die. This is the incentive IHT provides.
My rational brain says that IHT is fine in principle, especially given the now very generous IHT free allowance, which only a small proportion of estates exceed. I don’t see the housing boom in the south east as a reason to raise the IHT threshold – this is not ‘hard-earned’, this is luck at having bought a property at the right time and in the right place to benefit from a housing shortage and easy credit. As is obvious to all of us, this will only increase inequalities in access to housing.
I like the proposal that IHT should be taxed on the recipient – and that gifts should also be brought into this regime. There could be a lifetime gift allowance; but this change would be fairer by being related t the recipients’ wealth and not the donor. It would also stop all that second guessing about how much wealth to give away in your lifetime.
I agree also with all comments about inheritance provoking strong emotions. It’s all too easy to start thinking about your potential inheritance not as a lucky bonus, but as somehow ‘yours’ and hence resenting the tax take. As a parent, I can also relate to people’s strong desire to leave their wealth to their children. Basically, there is nothing you wouldn’t do to give your children all that you can to help them in life. That’s your job. That doesn’t mean ‘give them as much money as they want’ – because most parents would recognise that is not actually likely to produce happy children in the long run. It does mean however that you would not, generally speaking, wilfully watch them suffer for want of help (material or otherwise) you could provide. Some parents also recognise their good fortune in benefiting from free education, plentiful employment and affordable housing, and want their children to experience the same. I’m very grateful to my parents (who had benefited from scholarships/grants) for giving me (just) enough to live on as a student, so I graduated with very little debt. I myself struggle with how much to leave my children – somehow, diverting my wealth to charities instead of them, because they have ‘more than enough’, feels uncomfortable.
These strong emotions generally do not make for good or equitable public policy. That’s why we don’t let victims of crime set punishments! They’re just too bound up in the emotion of it all. Same with IHT.
TI — Not strictly related to this discussion on IHT, but I wonder whether you could consider recruiting a “tax expert” to add to the excellent Monevator team. Over the years there have been several Monevator articles on taxes (ISAs, withholding taxes, taxable income in accumulation funds…) . But I feel that this is an area where some/many of your readers (myself at the front of the pack) may benefit from some regular Monevator plain language expositions and discussions, to inform our saving and investment decisions (both in the accumulation and de-accumulation phases).
Just heard and interesting — and unsurprisingly eventually heated — Radio 4 Moral Maze program all about inheritance. It got bogged down in an argument about children and their chances, which I think is partly beside the point, since overwhelmingly when we talk about inheritance it’s going to adults at least in their 20s and more often in their late 30s/40s onwards. So a straw man to my mind but anyway, something for all sides in it. Should appear here soon: http://www.bbc.co.uk/programmes/b06101bd
@R — Very hard to get people I’m happy writing for us to be honest. I did ask a ‘good’ and seemingly friendly IFA if he fancied getting involved once but didn’t hear back. Everyone who writes for us I know personally, so I’m probably going to have to wait for a tax expert to enter my life. (I know a corporate one but a bit different). What I would say though is tax is complicated specifically because it’s so full of quirks and different across individual circumstances (the code is 17,000 pages long!) so I wouldn’t hold your breath. 🙁
Just an update following yesterday’s Summer Budget — it’s clear that I and hundreds of thousands — if not millions — of business owners will now be paying significantly more in tax from 2016 as a result of the changes made to dividend taxation.
While I’m a business owner rather than a self-employed contractor, that community is always quickest off the mark on this, and you can see some examples of the maths here: http://www.contractorcalculator.co.uk/contractors_pay_extra_75_tax_dividends_april_497910_news.aspx
One thing they have not taken into account is the plan to lower corporation tax. This should reduce some of the pain, but by no means all of it.
So while you can’t really net Tax Relief on A against a tax rise on B, as I’ve said many times we have to tax something to fund the State, and the Government yesterday made its choices.
With yesterday’s budget, the Government just decided to tax harder entrepreneurs and to tax less hard those* who receive inheritances for doing nothing except being born say 40 years ago to the right person.
Again, that’s not the way I’d construct a society, in terms of incentives to promote economic growth and so forth.
*Some will of course argue again it is not the children who are being taxed but their hard working parents who earned the money. And I say again, the parent is *dead*. That’s why the inheritance has kicked in. I don’t have any problem with the parent spending their money when alive on their own pleasures or good causes or drug habits however they like. They earned it and paid their taxes, they can enjoy it. It’s the children getting a tax free windfall I’m objecting too.
Also, I do see the point raised by some that the economic incentive of lowered IHT is for the parent to work harder to provide this eventual inheritance. However I don’t agree that’s preferable to cutting out the middle man and instead encouraging every man or women to do the best for *themselves* when they’re alive, rather than receiving the benefit of someone else’s hard work tax-free.
p.s. Sorry, there’s just too many comments now on this thread for me to reply individually, but again I do appreciate all the well articulated views, very much including those from the opposition. It’s been a great discussion! 🙂
This is really just tweaking tax such that those taking income as dividends pay about the same tax as those who have to pay income tax and NI. Small business owners could switch to paying income, but when faced with employer’s NI as well as employees, will probably choose to just continue with dividends as they are still a bargain.
Of course, retired people using an unwrapped portfolio (from PCLS?) for dividend income don’t have many great options.
I’m frankly baffled that current rules only allowed for a nominal 10% tax credit, considering the profit of the underlying company out of which dividends are paid already attract 20% company tax. Companies are financial and legal vehicles ultimately owned by individuals. Whether income comes from investment or hard work (or both), it should be treated equally.
Company tax is ultimately another form of PAYE. We pay our business accountants to manage our company taxes, and then we pay our personal accountants to manage our personal taxes. That’s a lot of compliance costs that the tax system introduces, costs that reduce our returns!
There is a strong case for normalising company tax, income tax, capital gains tax and simplifying all taxes and welfare payments. Households should be treated as a whole for tax purposes.
Simpler (and lower) taxes would broaden the tax base. The incentive for earning income should not be diminished for either the most productive individuals or for those that are transitioning from dependency to independence.
Individuals should be responsible for their own and their household’s welfare. Tax should support this aim.
Monevator bangs on about minimising the cost of investing. Well, tax is a cost of living and investing in ourselves.
@all — For the sake of those who don’t speak Personal Finance acronym-speak that some people insist on using, the PCLS that @gadgetmind keeps referring to is Pension Commencement Lump Sum (aka the famous 25% tax-free lump sum).
I really do dislike excessive use of these acronyms (I’ve moaned to blogger Ermine on Simple Living in Suffolk about them, too, as he’s a regular offender). There’s a great speech by Musk in his bio on how they just increase confusion, and why he bans their proliferation at Space X.
Obviously sometimes they’re helpful, but at the least I think they should be stated in full first.
(No hard feelings @gadgetmind, just don’t want people to be confused!)
Well, I much preferred the name “tax free lump sum” and am still very scared that it’ll be taxed or capped before I get my hands on it.
As for TLAs (three letter abbreviations) and ETLAs (extended three letter abbreviations), mea culpa and I’ll expand for clarity in future.
From personal experience in my own industry (oil and gas), the contractor dividend tax ruse has promoted a culture of short-termism and effectively produced a corporate merry-go-round in Aberdeen where one-man “companies” flip from project to project with ever spiralling day rates and a small pool of labour to draw from.
IR35 rules had done little to stem this racket. Whilst the new dividend rules appear to be a pretty blunt tool, a change was needed to correct distortions in the labour market which the previous dividend rules promoted.
Unfortunately for George, with the vast majority of north sea production currently uneconomic and large numbers of contractors laid off due to the drop in oil price (which labour rates arguably exacerbated), his tax take from oil and gas contractors is likely to be pretty slim pickings.