Why Inheritance Tax must be scrapped

Regardless of where you are on the political spectrum, the current system of Inheritance Tax in the United Kingdom is the worst of both worlds.

In 2018, the UK’s tax authority, HMRC, booked ￡605.8 billion in total tax revenues. Only ￡5.5 billion (0.91%) of this was generated from Inheritance Tax.

With such a relatively small figure, abolishing the tax would do little harm to the public purse. Meanwhile, it doesn’t do an amazing job at ‘taxing the rich’ because the government earned more in the same year just on tobacco duties (￡8.8 billion).

On the face of it, Inheritance Tax is supposed to be an eye-watering 40% on the value of one’s wealth at death. Therefore, if a single person dies with net assets worth ￡250 million, you would expect something in the region of ￡100 million to be coughed up to HMRC, right?

The truth is that many people in such a position would have been advised well in advance by specialist wealth managers on how to reduce that potential tax bill to virtually zero.

So who is more likely to be caught by Inheritance Tax? Families that have been wealthy for generations, descending from the aristocracy or is it the middle class and the ‘new money’ – people who more recently climbed up the social strata?

Those in favour of imposing a tax on inheriting ‘unearned’ wealth should at least agree that the current system does not achieve their aims and probably helps to widen the wealth gap: It boils down to those who have and have not sought professional advice.

Free Market Solution

In my opinion, a low tax regime stimulates wealth creation and therefore a tax on inheritance gets in the way of those who are driven to provide for their family over the long term. Instead, job-creating investments must be liquidated to pay the taxman.

Also, it's worth noting that rich people tend to stay rich by making financial decisions that benefit the economy - whether that's their intention or not. If a wealthy family makes poor choices with money, it will eventually abandon them and end up in hands of the more efficient and productive. This is how the 'invisible hand' of capitalism works when interrupted by policies such as inheritance tax, which waste resources and distort the market process.

Redistributive Solution

If, however, you disagree and would prefer tax on inherited wealth, a much better alternative is a ‘gift tax’: You receive an unearned gift and a percentage must go to HMRC, which is your responsibility to pay – not the donor. Sure, there could be some reliefs and exemptions for the less wealthy but this kind of tax would be much harder to avoid as it’s based on a transaction rather than a snapshot of one’s ‘estate’ at a particular time (think about how difficult/impossible it is to avoid stamp duty, for example).