When it comes to taxation, I agree with Mr Churchill who proclaimed, “Taxes are an evil—a necessary evil, but still an evil, and the fewer we have of them the better.”
Churchill was a prolific writer. After the First World War, royalties from books and articles propelled him into the 50% tax bracket. Churchill’s penchant for Romeo y Julieta cigars and Pol Roger champagne meant that he was unable to reconcile his accounts. When Churchill became Chancellor of the Exchequer in 1925, he discovered that he owed the equivalent of £400,000 in unpaid tax and had no means to pay off the debt.
Churchill’s solution was to summon Richard Hopkins, chairman of the Inland Revenue, and ask for help. Hopkins came up with a wheeze which involved Churchill “retiring” as an author, claiming unpaid fees as capital receipts instead of income, and thereby halving his tax liability.
The burden of UK tax as a proportion of GDP is now at its highest point since the immediate aftermath of the Second World War when Clement Attlee tried to reduce the huge public debt which had accrued because of government borrowing to finance the war effort. Britain’s debt exceeded 200% of GDP and the top rate of taxation rose from 65% in 1938 to 97.5% in 1948. In 2021, the tax burden in the UK increased faster than France, the US, Italy and many Scandinavian countries.
Churchill said, “the idea that a nation can tax itself into prosperity is one of the crudest delusions which has ever fuddled the human mind.” Jeremy Hunt needs to channel his inner Churchill and find alternative means of paying back the £200 billion borrowed to support the economy during the coronavirus pandemic. He could start by throwing inheritance tax into the dustbin of history.
The Attlee government raised inheritance tax (then called “estate duty”) from below 60% to 80% and it peaked at 85% in 1969. Today, IHT stands at 40% – as it did a century ago – but there is a growing clamour for IHT to be raised as many see it as a tax which targets inherited wealth without penalising hard-working, low-income wage earners in the NHS who battled through the pandemic to make the world a safer place in the same way as the brave soldiers, sailors and airmen of WW2.
Official figures this week showed that the Government borrowed a record £27.4bn in December 2022 to plug the gap between tax receipts and public spending, according to the Office for National Statistics (ONS). This is £9.8bn more than forecast by the Office for Budget Responsibility (OBR), the government’s spending watchdog, and the highest December borrowing since records began in 1993.
Fortunately, the long-suffering taxpayer can be relied upon to prop up this largesse. As house and asset prices rise (thanks to all those houses not being built in the Tory shires), more and more people are drawn into the inheritance tax net.
In the Autumn Statement, the Chancellor announced that the inheritance tax threshold of £325,000 will be frozen until April 2028. So, a levy that was intended for the rich has gradually turned into a tax on anyone who happens to own their own home, with a growing number of middle-class families being hit, especially in London and the south-east.
With soaring inflation and most personal tax allowances frozen, including the basic rate, rising levels of inheritance tax are becoming a more insidious force on household finances.
The Government has introduced various reliefs which in theory should allow bereaved families to protect more of their assets, but figures published this month, and analysed by the Telegraph, show they as not helping as much as expected.
The most significant break, enabling spouses to transfer assets between one another tax-free, saved families £500m less than HMRC predicted.
Rather than tweak our failing inheritance tax system, it should be scrapped altogether and replaced with a £1m tax-free lifetime limit on gifts and tax (indexed to wage increases) with anything above taxed at a flat rate of 20pc. This would raise more money without hitting middle earners.
A majority of OECD countries currently have some form of inheritance tax. However, these taxes typically raise very little revenue. According to the OECD, only 0.5% of total tax revenues come from inheritance, estate and gift taxes on average across the countries that levy them, and increasingly this revenue is falling on the squeezed middle rather than to individuals with what we would describe as significant wealth.
It is unsurprising then that some countries have already ditched this most hated tax. Sweden’s inheritance tax had existed since 17th century, but increasingly attempts to provide reliefs in order minimise its damaging effects had proved insufficient with a relatively large share of inheritances owing some inheritance tax. In 2004, Sweden, with its hard-won reputation for egalitarianism, decided to scrap the tax altogether. I think British politicians may now be approaching a similar tipping point.
A sound tax is one which generates significant revenue and alters an individual’s choices as little as possible. Inheritance tax fails on both counts, with the wealthiest avoiding it on a grand scale through trusts, gifts and wheezes. And yet successive Conservative governments have been content to keep this immoral tax which punishes responsible savers and represents an attack on middle-class aspirations.
As we emerge from years of political instability, this Government finally has a chance to address Britain’s fundamental economic inequities, issues such as the equal tax treatment of the self-employed, the relinquishment of the “triple lock” and – quelle horreur – scrapping IHT. The long-term benefits would be immense.
Taxing wealth on the event of death has no moral basis: it amounts to ‘double taxation’; it taxes individuals differently according to how they use their wealth, and it targets the wrong problem, which is not inequitable concentration of wealth but unequal opportunity for wealth creation. Inheritance tax should be anathema to a supposedly Conservative government.
I will leave you with a quote from Winston Churchill: “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”