Azara Blog: Inheritance tax catching out more and more people

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Date published: 2005/11/19

The BBC says:

The number of UK homes that will be subject to inheritance tax has tripled in the past five years, the Halifax bank has said.

It said house price rises meant the tax would be payable on 2.1 million homes.

The bank reckons 12% of all privately owned homes are worth more than the tax threshold, rising to 50% of homes in London and south-east England.

Currently, people have to pay tax at a 40% rate on inherited assets worth more than £275,000.

That threshold is scheduled to rise to £300,000 in the tax year 2007/08.

But Martin Ellis, the chief economist at the Halifax, said it should be pushed up much further:

"This trend will worsen unless the government acts now and raises the threshold to fully reflect the increase in property prices."

The bank estimates that if that lower limit had kept pace with property inflation over the past 10 years it would now stand at £406,600.

A Treasury spokesperson said: "No previous administration has ever linked tax thresholds, including inheritance tax thresholds, to price movements of any particular asset. The practice of this government is no different."

Inheritance tax is estimated to bring the government an income of £3.4bn this year.

That is a rise of nearly £1bn pounds in just two years.

Of course homes themselves are not subject to inheritance tax (as stated in the first paragraph), it is the total estate of a deceased person. Well for most people by far and away the largest asset in an estate is their house, but many people only have part (typically half) shares in their house. Anyway, there is the general question of whether inheritance tax is "fair" and whether the rate (40% above the threshold) is "fair" (whatever "fair" is deemed to be). Inheritance tax sounds like a great idea. Tax the assets of "rich" people when they die so that their horrid undeserving children do not just inherit all the money, having done nothing to earn it. Unfortunately inheritance tax has some fatal flaws which mean that the only really fair way forward is just to abolish it.

The main problem with inheritance tax is that there are exemptions. For example, assets left to a spouse are exempt. This was introduced for the plausible reason that nobody wants an elderly wife or husband to be kicked out of their house when their spouse dies just to pay a tax bill. Gay couples who have civil unions will also soon qualify for this exemption. But what about everybody else? What about people who are not married (a large set of people these days)? What about people who live with their siblings? What about people who live with and look after their parents? These people are just as deserving as the politically correct categories that are currently exempted. You could probably make a case that just about anyone is deserving and it would be far too complicated (and arbitrary) to set down plausible rules as to who was and who was not. So instead just abolish inheritance tax.

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