The Case for Getting Rid of Inheritance Taxes

The UK has a complicated, punitive, badly constructed, and all-around dysfunctional tax system.

The code contains over 10 million words. That is about 12.5 times the number of words in the Bible (around 800,000 words), 12 times the number in the Complete Works of Shakespeare, and 8 times as many as the longest novel ever written (Marcel Proust’s À La Recherche Du Temps Perdu).

Lots of the taxes we suffer from are double taxes (paid on money you have already paid income tax on). Think of everything from VAT to capital gains tax (which, as it is unindexed, also operates as a wealth tax). Others act as disincentives — to mobility in the case of stamp duty on house purchases, and to investment in the UK in the case of stamp duty on equity trades. And almost all have some input into our relentless sluggish productivity performance.

Among these lousy taxes, however, one stands out as particularly awful and particularly loathed — the inheritance tax (IHT).

The best taxes are low and hard to avoid (so no one bothers to try). The worst is high and relatively easy for the well-off to avoid (so the effort of doing so is well rewarded). IHT has both of the latter characteristics — plus the extra kicker of too low a threshold. It used to be for the very rich. Now it is not: More than half the estates that end up paying IHT are valued at under £1 million ($1.2 million). The allowance has been fixed at £325,000 since 2009 and will stay that way until 2028 (hello, fiscal drag). Over that level, the rate is a fairly shocking 40% on all assets held in the estate.

For context, note that since 2009 the average price of a house in London has risen from well below the threshold (£245,000) to well above it (£532,000). There is a silly loophole for the “family home,” which brings the total to most of £500,000 and hence £1 million for a couple. I say silly as there is no obvious reason for a home to be more exempt than anything else (there is no special exemption for the family art or the family classic car collection), and most heirs flog the house as soon as they can anyway.