Inheritance tax is the only wealth tax that works

If the Tories really believed in levelling up they would extend IHT not scrap it

Photo by Josh Appel on Unsplash

I know the Tories are supposed to be the stupid party, but do they have to work so hard to live up to their image?  Dithering about HS2 before Rishi Sunak’s most crucial pre election party conference.  Madness.  Just build the thing!

I’m in Italy right now where the trains not only run on time, they are cheap and a joy to use. How can Britain, which gave the world the Industrial Revolution and the steam engine, be unable to build a single modern railway line? Of course the cost of it has increased absurdly, almost criminally.  But that is not an excuse for failing to do what every European country can do.

It is an abject failure of elementary cost control. Like the bonkers idea that restoring the Palace of Westminster will cost £13billion.  If Conservatives can’t manage money, can’t keep capitalism under control, what possible point is there in having them?  What are they there for? Would Margaret Thatcher have rolled over simply because a bunch of overpaid and brain-dead bureaucrats had said that building a railway should cost almost as much as NHS  She’d have raked them over the coals until they got the numbers right.

Actually, the main reason HS2 costs have risen to the stratosphere is because of Tory Nimbys in the shires insisting that the thing has to go underground for large stretches - or so I am reliably informed. But again, to capitulate to a handful of people who care more about their back yards than the economic wellbeing of the nation just shows the Tories are not fit to lead a branch of the Ramblers Association. And yes, I do realise that many members of said countryside recreational body would probably be anti HS2. But to govern is to choose.

However,  the idiocy of HS2 is as nothing compared to the plan to abolish inheritance tax. This is one of the few taxes that actually work and that people are prepared to pay.  Not all that many, I grant you, but the numbers paying the 40% tax on their £325,000 estates  are increasing rapidly since the rate has been frozen. It is bringing in real money, around £7bn a year and, crucially, that revenue  is increasing by £1bn every year.

Now I have to declare an interest here because when I succumb to the grim reaper I, or rather my family, might have to pay IHT just as I had to pay inheritance tax on my mother’s house when she died. Don’t believe those dodgy accountants who tell you that “no one pays IHT.  People do - because for all their grumbling they realise that taxes on unearned wealth are fair.

One of the defining characteristics of modern Britain is wealth inequality.  It is rising immeasurably faster than income inequality. As the Institute for Fiscal Studies regularly reports, this is largely because of rampant inflation of house prices over three decades.  41% of London post codes now have have average house prices of over one million pounds - up from 24% in the last decade alone.  Even unglamorous places like West Acton and Wapping are now in the million pound club. Some inner London postcodes have averages well in excess of £2million.  And the asset inflation story can be replicated across the country, though not quite on the scale of the South East.

Around  £7trillion in housing wealth will, in the next two decades, be handed on a plate to a generation of predominantly middle class Millennials.  These are life-changing sums of money which people have acquired, not through enterprise or hard work,but simply by occupying a space. The fact that the beneficiaries of this windfall will often be the very people who’ve been complaining on Twitter about inter generational inequity is beside the point.

Unjustified wealth transfers are incredibly socially divisive.  Inter generational injustice is one of the most corrosive issue facing countries like Britain.  Having an entire generation of angry young men and women who can’t start families is the surest way to political instability and erratic populist politics. Ask almost any young person under 40 what most irks them about their lot and they will cite the fact that old people seem to have all the advantages and left them with all the costs.

Now Inheritance Tax or death duties as it’s often called is not going to sort this problem of inter generational inequity overnight. But it has to be part of the solution. Allowing the baby boom generation to hand this windfall on intact to their kids will perpetuate a grave inter generational injustice.  It will lock in this iniquitous social divide into the fabric of society. The greatest engine of social inequality today is whether or not your parents own a house. Not all do.  40% of us still rent.

The left has been proposing levying a 1% annual wealth taxes on pension funds and housing as a solution to wealth inequality.  But this is fraught with anomalies because you can’t tax unrealised assets.  If you have an annuity pension, for example,  you do not actually own the fund: the insurance company does.  Similarly, you can’t tell people to sell their homes to pay a tax on its nominal worth. They may simply not have the money because they are income poor and asset rich.

However you can tax this asset when they die. That is when the accounts are settled and assets are  realised. It’s the turn of the cards; the final reckoning. That is moment to tax wealth. Indeed I would argue that Inheritance tax is the only viable wealth tax.

To repeat: people accept inheritance tax as fair and generally pay it.  It is delivering much greater tax revenues as the baby boom generation dies. IHT is the fairest way to redistribute some of the windfall gains  that the boomer generation have received. A Conservative Government that actually believed in levelling up would extend IHT not scrap it.