Labour’s rocky relationship with Inheritance Tax

Posted by James Greig on

Historically, the Labour party has favoured death duties (or Inheritance Tax as they have been known since 1984). What better way to redistribute wealth of the landed gentry than to collect it on death to save it from the undeserving children? And who better to decide how that wealth should be distributed among the deserving masses than the government, as the people’s chosen representatives?

However, according to The Tax Detox, a report published this month by the left wing think-tank the Fabian Society, the masses have had a rethink themselves. Their vote: “Inheritance should not be taxed.” What on earth has happened to the masses and to left-wing thinking?

They do not intend to abolish tax on death altogether. Instead, they intend to replace it with a system more akin to what's in use on the continent, where it is the status of the recipients which will decide how much tax should be paid. The beneficiaries should not be let off entirely; instead they should be charged income tax. The total tax paid on death will therefore not depend on the wealth of the deceased, but the income position of the beneficiaries. For example, a son, single with no family, living off capital will pay less tax on his inheritance from daddy than his hard working brother who has a high marginal rate of income tax and a family to support.

Why, in spite of its unpopularity, is it so hard to come up with a convincing alternative to Inheritance Tax?

It is hard to say but these are my observations. Firstly, the masses are feeling wealthier than ever before. Inheritance Tax concerns are no longer the preserve of a wealthy few. Secondly, Inheritance Tax continues to be politically sensitive and therefore a fascinating tax for historians and social observers. Thirdly, Inheritance Tax is likely to continue in largely its present form for some time to come, since nobody seems to be able to come up with anything better.

And finally, a prediction. If anyone has the originality and nous to come up with a better system it is likely to be the canny Scots, for two reasons. Firstly, they are celebrating this week being able to set their own income tax rates and they have the wind in their sails. Secondly rich foreign golf-course owners (such as Donald Trump) and deer-stalking landowners (such as the English Sassenachs) are surely fair game for tax raids from Holyrood. So, for Inheritance Tax and general wealth tax reform, watch north of the border rather than the Fabian Society for inspiration!

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James is the head of our Wills, probate, tax and trusts team based in the Thames Valley.

James Greig
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