The Case For Inheritance Tax

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Closing tax loop holes

Last week we put forward the case for scrapping inheritance tax (IHT). This week we share the case for keeping it. What do you think?

Let's cut the cack on inheritance tax. First off it is not a death duty, and it's not a tax on a lifetime of hard work, careful saving, and restraint either.

Most of the wealth that an inheritance tax (IHT) targets is based on property — the value of the deceased's estate. And most of that is down to rising house prices, which isn't the result of thrift but a by-product of economic growth and low interest rates.

IHT is good for us — because not taxing inherited wealth has a proven negative effect on the work incentive of the beneficiaries. Why bother to graft if Daddy's left you a mint? And why bother to start a new business if you're sitting pretty?

As the 19th century Scottish philanthropist Andrew Carnegie wrote: 'The parent who leaves his son enormous wealth generally deadens the talents and energies of the son and tempts him to lead a less useful and less worthy life than he otherwise would.'

Studies by the Policy Studies Institute and the London School of Economics tell us what we already know. They show that the vast majority of people work to 'earn money for necessities' — in other words to keep a roof over their heads, food on the table and the wolf from the door. So it's not surprising that US researchers found that: 'An inheritance received by a family reduces the probability that both spouses will continue to work, and increases the probability that both will retire.' (Syracuse University study).

Untaxed inheritance increases the possibility that talented people will swerve work altogether.

On top of that, the prospect of paying IHT encourages parents to invest in their children's education in order to help them to become as hard-working and productive as they were. So an inheritance tax makes great economic sense.

Even Adam Smith supported a tax on wealth inherited by children 'who have got families of their own, and are supported by funds separate and independent of their father'. (The Wealth of Nations)

Besides, if we scrap or radically reduce IHT how do we replace the lost revenue? It's hard to imagine any government in the near future reducing state spending. On the contrary, it's likely to carry on rising. So without IHT, isn't it likely that a future Chancellor would instead be forced to increase tax on small business people and pensioners?

Small businesses should be boosted, not punished.

To recap, an inheritance tax is not about punishing the thrifty. It's about encouraging productivity and increasing opportunity for the vast majority — more than 90per cent — who come from backgrounds that aren't wealthy enough to be liable to pay it.

Only about 6percent of the value of inherited property in the UK is paid in tax. That's less than in most other countries, and less even than in the days of feudal England.

Isn't that a case for raising it rather than lowering it further? And closing the loopholes that allow property here to be owned off-shore?

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