Progress | Centre-left Labour politics

A taxing role

Steve Van Riel thinks inheritance tax is more Robin Hood than Sheriff of Nottingham

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‘Dead wrong: Why we’re campaigning to stop inheritance tax robbing ordinary homeowners’ was the headline in The Observer.  The story has returned every Sunday since then.  House price inflation has increased the personal wealth of lots of middle class people.  The outrage is that, when they die, this new wealth will be taxed on its way to their children. 

When you think about the rest of the left’s agenda you realise just how strange this sounds. The government has begun to tackle asset inequality with a radical new type of welfare. Think of examples like the Child Trust Fund or the recent moves to help people in social housing buy a part of it.

Who are The Observer’s ‘ordinary people’? Here’s a better definition – from Labour’s own Shaun Woodward MP, ‘I am not talking about well-off middle class people. I am talking about people in the 80s who bought their (council) house which today is worth around the limit.’

The threshold is £263,000.  You may wonder how many £263,000 ex-council houses there are in St Helens South, his constituency. But let’s take Shaun Woodward at his word, let’s say this imaginary house, and the rest of the estate, is worth £300,000.

The child of the imaginary individual walks away with £285,200.  That’s because the tax only affects the money after the threshold (on 40 percent or £14, 800 of tax).  £285,200 might not buy you an imaginary council house in St Helens but it’s about thirteen times the average annual pre-tax salary.
What you own, more than what you earn, determines your position in British society today.  Assets make you independent.   Around one in ten people in Britain have no assets; around one in three have no savings.   If you are in that one in ten you don’t have any economic defences.  Your position is precarious.  You have no choice but to take the short term, no future, route through life.

These are not the £300, 000 poor. Large inheritances will not go to those who don’t own already.  In normal circumstance, we imagine children inheriting when they are in their 40s.  By that point, they’ve probably done quite well for themselves, as middle class children do.

Think about it this way – whose life is that £14,000 of tax going to improve more?  The kids who get a £500 slice of it to start off their Child Trust Fund? Or someone who’s already comfortably off and is about to receive an £285,200 unearned bonus?

The Institute for Public Policy Research has published a detailed paper on inheritance tax.  Their proposals are interesting but they have given ground to the anti-tax lobby. The paper argues that the tax should be banded, starting at 22 percent, then 40 percent, then 50 percent.

Fifty percent top rates of tax always receive scepticism because it’s believed such rates can encourage cleverer accountancy rather than greater payment. But that isn’t my point here.  The 22 percent band, effectively a tax cut for Mr Woodward’s £300, 000 poor, can’t be justified on any other grounds than that we really ought to be a bit nicer to the middle aged children of the upper middle classes.

Inheritance tax should be an easy tax to defend.  It doesn’t distort the market, it doesn’t hurt the poor and, best of all, if you are going to tax anyone, tax dead people.  The £2.5 billion it currently raises would have to be raised elsewhere, by taxing spending or earned income.

Either that or there would have to be cuts to public services.  Just for reference, the ippr puts current inheritance tax revenue at about the same size as the entire capital budget for the NHS in England.  If the surveys which prompted all this outrage are right, then the public sector is going to become increasingly reliant on inheritance tax in years to come.

Progressives look fairly daft, and lose elections, if they just defend the status quo.  There are injustices in inheritance tax and the ippr proposals on preventing tax avoidance would be a good start.  The Treasury has already closed off a number of loopholes, helping homeowners keep everything they own in the hands of their children would be a step backwards.  Making more people economically independent will not just require public spending and taxation.  Ambitious and creative policy proposals are needed.

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Steve Van Riel

was the Labour party's director of policy and research at the 2010 general election

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