Inheritance Tax should be scrapped

Amid continuing reports of significant increases in house prices, Jean\'s story is a cautionary one and very much a tale of our times.

Jean was a devoted daughter who looked after her widowed mother. They lived together in a flat just off the sea front in Brighton. They didn’t regard themselves as wealthy. In fact they had few savings and in many respects struggled to get by. However, they were proud of the fact that largely due to Jean’s part-time job they managed to look after themselves and were not a burden on the state.

But a couple of months ago Jean’s mother died, and now Jean faces not only the emotional pain of losing her mother but also a financial nightmare.

The flat has been valued at 390,000. With Inheritance Tax charged at 40% above a threshold of 285,000, Jean has received a tax demand for 42,000.

Even with the option of paying by instalments over a period of up to 10 years this is an impossible financial burden for her to meet and as a consequence she will be forced to sell the flat she regards as her family home.

Jean is a fictitious character but the situation I have outlined is all too common. This is how the system of IHT operates – it is unfair and punitive. It also often represents a form of double taxation because it is applied to assets that were acquired from earned income and which has already been taxed.

Increasingly, it hits people who were never liable to the higher rate of Income Tax in their lifetimes. In death their assets are taxed at 40%.

The way IHT works is effectively to penalise hard work, thrift and enterprise. For these reasons it should be abolished.

The taxation of a person’s assets at the time of their death dates back to 1694. Like Income Tax just over a 100 years later it was a tax introduced to help finance a war against France. 1894 saw the introduction of Estate Duty which was replaced by Capital Transfer Tax which in turn was abolished in 1988 in favour of IHT.

What is clear is that the architects of the tax never intended it to apply beyond the landed gentry or the very wealthy. It was aimed at a tiny minority of estates but the effect of a strong and stable economy plus house price inflation means that IHT is becoming a big issue in many parts of the country.

Halifax calculates that more than 1.5 million properties are valued above the threshold for IHT liability. And it is these ordinary home owners who are hit hardest by the way the IHT system operates.

Under the rules, a gift made during a person’s life may be exempt from the tax provided the individual making the gift lives for at least seven years afterwards. This provision is used extensively by those with significant assets who can afford the best financial advice. They are able to legally avoid paying IHT by gifting their assets. This is not an option for people whose main asset is their family home and who have limited liquid assets.

For many years, politicians have competed to offer voters a choice between higher or lower taxation linked to increases or reductions in spending on public services. This debate will no doubt continue but it should take place alongside a detailed consideration of the way revenue is raised in the first place.

The fact that we have had a tax on death since the 1690s is not the strongest case for its retention in the 21st century. A modern tax system should have a wider purpose than simply raising finance. It should also encourage responsible behaviour that will benefit individuals and the wider community.

IHT raises 3.3bn each year. Although this is not a large sum, its abolition couldn’t take place without increased taxes elsewhere. I would favour an increase in the level of environmental taxes. Over recent years the income from this source has been in decline. In 1999 green taxes represented 3.6% of gross domestic product. Today this proportion has fallen to 2.9%.

To replace IHT by increasing the burden of taxation on environmentally harmful ac-tivities could change behaviour in a way that would benefit individual, families and the wider community.

Also, it would be difficult to overstate the political impact of the abolition of IHT by a Labour government. It would send out a powerful message regarding the political direction the party intends to take.

We know that Prime Minister Tony Blair will stand down at some point before the next general election. In electoral terms, the dan- ger for Labour has always been that when he leaves Downing Street for the last time, voters will feel that the pragmatic and modernising approach of New Labour is leaving with him.

The challenge for his successor is to demonstrate that this is not the case and show that they are in touch with the needs of the British people. There must be a recognition that things move on and fresh issues emerge that have to be addressed. One of these has to be the effect of IHT. Soaring house prices affecting wide swathes of the country mean millions of voters could be caught in its net.

The abolition of IHT would show that Labour is prepared to look again at the tax system to ensure that it is grounded in fairness and also that it reflects the needs of the modern world.