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Sunday, 5 November 2017

ABOLISH DEATH DUTIES and replace (some of?) them with LVT revised
What a wicked idea! Abolish Death Duties, officially called InHeritance Tax—IHT. By definition, dead people have no more use for their wealth. If you are lucky enough to inherit wealth, you got to admit that you’ve done nothing to earn it.

So IHT may be a totally justifiable tax, but the voters, especially the precious hard-working middle class families don’t like it at all. You may be surprised to learn that these ‘Death Duties’ are the most detested tax of them all. This is what the Labour-supporting Fabian Society discovered in a focus-group study of voters[1] found:

                  [T]hey were almost unanimously opposed to taxation of inheritance, regardless of their        political views. Their arguments were striking, emotive and mostly unequivocal. The                   taxation of inheritance was seen as overwhelmingly illegitimate and unfair. The most cited   reason was that inherited wealth was subject to ‘double taxation’: parents and  grandparents worked, saved and paid taxes, only for their accrued wealth and property to  be subject to taxation once again upon the handover of their estate.

This view of IHT as the ‘most unfair tax’ also came up in the YouGov survey. It is no good trying to tell people that their fears are largely unwarranted, that very few families are hit by Death Duties[2]. Unfortunately, IHT no longer works as Lloyd George in his People’s Budget of 1909 intended.

As the twentieth century progressed the super-rich have found many legitimate ways to dodge paying IHT, so it has almost become a voluntary tax for them. It now only hits the fairly rich. As a result, the yield from this tax in 2015-16 was £4.6bn, which is about half of the Stamp Duty harvest.

Very few estates of the deceased are required to pay any IHT. In 2012-13 there were 261,384 estates of which only 17,917 paid IHT. This is less than 7% of all estates[3]. So IHT does not yield much tax revenue, nor does it hit very many tax-paying families.

Why not do something politically clever, even though it’s a bit morally iffy. Let’s abolish Death Duties!

There’s a strange anomaly in the Stamp Duty regime. If no money changes hands, no Stamp Duty is payable! Here’s what the taxman says[4]:
·                Transfer of deeds. If you transfer the deeds of your home to someone else – either as a gift or in your will – they won’t have to pay Stamp Duty on the market value of the property

(You also pay no Stamp Duty during divorce split-ups of property. I think we’d better leave that exemption alone, along with the transfer of titles post-mortem of a married partner)

Just to make this a bit clearer: when you inherit, only the lucky top 7% inheriting a slice of real wealth (£328,000 or more) need pay Death Duties[5]. For the vast majority (93%) of cases there is nothing to pay. It’s a free gift.

รจ Which gives an obvious nudge for a small tax-change: Make all inherited landed property subject to Stamp Duty at the market price. But this won’t be the old big lumpy form of Stamp Duty. It will be the new mini-Land Value Tax with a little bit paid annually.

But: (discussion)
                  1.—should this include free transfers between non-spouses? I’ve suggested that we keep out             of the political minefield of divorce and widowhood, but what of other free transfers? Are they        few enough in number, and mostly done for tax-dodging reasons that no-one will complain?              Or are there innocent reasons?

                  2.—the top 7% would squeal that this is an extra tax on top of their IHT bill. So perhaps a slight          raising of the threshold would ‘lift another X thousand hard-working families out of IHT’ (and it is yet another little step towards the total abolition of the hated Death Duties altogether.)  …or..see point 4.

                  3.—would the revenue from the newly introduced mini-LVT be equivalent on a Present Value             basis to the previous yield of IHT? (£4 billion in 2015)? If not, how to introduce revenue-  neutrality into this process?

                  4.—Stamp Duty applies only to ‘landed property’. Other inherited forms of wealth eg shares would not fall into the new mini-LVT net but would still be hit by IHT. Since the super-wealthy have much more non-property wealth, should this reform exclude property wealth, but kick in at a much lower threshold, say £100,000 for shares etc.? After all such wealth is far more liquid, and can be converted into money in part or whole, therefore much easier to whack for IHT.  But, but these liquid assets are just the thing the 1% hide away offshore, and this partial-IHT would again only hit the fairly rich, who have a fog-horn ability to squeal!

So at this stage of the conversion of IHT into mini-LVT, only the landed property element of IHT would be subject to LVT, and this would require only a simple change of rules.

“When you die, your house(s) however many, however expensive will be exempt from Death Duties. When these houses are transferred to the inheritors they will become liable for Stamp Duty mini-LVT”

Meanwhile we could hit the trusts and p.l.c.s with this new LVT on the grounds that they never die. (It is one of the strange quirks of English Law that p.l.c.s have ‘personhood’, and can sue for libel — remember MacLibel?) Many of these trusts are set up to avoid IHT, so including their property element is fair game. “Let them die a little for the privilege of their everlasting life”

But hold on! We’ve reached the stage where there is still some IHT left, which is based on fungible liquid asset (shares etc.). The ultra-rich tend to have more money in shares than houses. So should we hold on to this sort of IHT to ‘soak the rich’?

No, it’s not really worth it. The 1% have taken elaborate precautions against being soaked—off-shore trusts being a major example. If this shares-based IHT is retained it will again be the fairly rich who get whacked, and all the same complaints will be made.

So let’s make a clean break! Abolish all Death Duties on all forms of wealth.

We can find better (sneakier) ways of recouping the small amount lost by increasing the rate of mini-LVT a little. Up from 0.5% to 0.65% maybe?

Let’s go for it!  

                  On Day 1 Abolish ALL forms of Death Duties, and

1.     All free transfers of landed property, (apart from minor exceptions like married partners) to be subject to the mini-LVT at market-prices. 
2.     All landed property held by non-humans, such as trusts and p.l.c.s be included in this new mini-LVT status.
3.     Increase all rates of LVT by about 0.15% because all other forms of IHT have been abolished

This can all happen overnight, apart from step 2. which might have to be phased in. Some political sleight of hand will be needed to explain away the increase in everybody’s LVT, to pay for the loss of some of the IHT revenues. It is a small increase, and it will hit the super-rich more, and perhaps with the compensation scheme it won’t feel too bad. I hope.

The cleanliness of the slogan “Abolish all Death Duties!” is too good to miss!

And IHT abolished may have some good outcomes as well
                  —fewer tax lawyers and accountants fudging up tax-dodging schemes.
                  —repatriation of moveable assets back to the UK now that they are not going to be hit with IHT

[1] Fabian Society pub ‘Detox on Tax’ Dec 2015 on fair tax
[2] One reason for this irrational fear of IHT is because of the persistent campaigning by the ‘Tax Payers Alliance’. See Owen Jones 2014 The Establishment

[5] In 2012-13 there were 261,384 estates of which only 17,917 paid IHT. This is less than 7% of all estates. 

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