Inheritance tax

Almost all industrial countries have some form of inheritance tax' (Nissim, 2007), whether it is charged to the ‘donor' or ‘donee'. As Nissim goes on to say most English speaking countries charge the donor, (that is the value of the estate minus any debts, funeral expenses, gifts to charities etc) inheritance tax is then charged before the estate is divided up amongst any heirs. This helps keep it simple and reduce the admin costs because it is only calculated and charged once instead of having to be separately calculated for each heir. The value of the estate includes all properties, savings and stocks of shares (except….. ). If the ‘donee' was to be charged according to the amount he or she received and based on their relationship to the ‘donor' this would be in line with ‘the majority of OECD countries' (Sandford, 1987). These countries tax ‘donees' because they feel it will encourage distribution among more heirs (to avoid the tax) so it is distributing wealth more evenly and better meets the aim of the tax - equal wealth distribution.

How well can they meet this aim? At the moment ‘government revenue from estates and gifts is lower than 1 percent of gross domestic product (GDP)…due mainly to a combination of considerable tax free allowances for close relatives and high thresholds were top rates apply' (Nissim, 2007). Appendix A shows the amounts collected from IHT since its introduction back in………. and Appendix B shows IHT collected compared with other taxes. In relation to other taxes collected IHT does not amount to much so how well does it really redistribute wealth? Although it is argued that IHT does not necessarily do a good job of redistributing wealth it is needed to ‘prevent too great an accumulation of wealth in the hands of and individual which no one needs for any personal purpose but improper power' (Trout and Buttar, 2000) They go on to say ‘inheritance is essentially a tool through which the wealthy preserve their economic and therefore political domination across generations' although this may at first seem far fetched it is true, those with most wealth can afford to influence government through large donations etc and what Trout and Buttar are meaning is that this could be stopped of people were stopped form inheriting large sums of money as they would then not be able to do this.

Even though all the government receives is ‘less than 1 percent of GDP' this is higher than in many countries. In an article for The Daily Mail Hopegood, (2009) points out that ‘the UK has one of the most punitive tax regimes in the developed world, our tax burden is greater than many countries except France and since labour came to power the number of people facing IHT has quadrupled to more than 1.5 million'. His idea for improvement would be to increase the threshold and have a ‘higher rate at the top'.

Of the millions of people who live in the UK, 1.5million people is not that many so why is IHT hated so much. A poll by………shows that it is the …….hated tax() Even as far back as the 1800s it was hated. An article by Max West in 1893 shows inheritance tax was felt to be ‘confiscation and extortion' and many writers today still agree. So what are the main reasons for hating a tax that affects so little.

Nissim(2007, Grossman, (1990) and Norregaard (1997) all agree high inheritances taxes may force people to leave the country and ‘take up residence in low tax jurisdictions' such as Australia, New Zealand, Canada, Sweden, Italy and now even America. Grossman's study of interstate migration in Australia after the abolishment of inheritance taxes in Queensland showed that there was an increase in migration to the state because of this although as Hoppit (2009) does point out not many move for the ‘sole purpose of escaping inheritance tax, but the absence of it is certainly a major factor in the decision making process.' Although Nissim to some extent agrees, he does feel that inheritance taxes are necessary and the country would be better of with higher inheritance tax if income and indirect taxes were reduced as these ‘are inefficient and distort economic efficiency and entrepreneurship'

Many argue that inheritance tax is an ‘ineffective tax' including Robinson (1989) who argues it is ‘ineffective' because ‘it can be avoided simply by giving away the estate to inheritors and surviving for seven years' which means that the wealthy will be able to avoid it while those less well of will be caught in the net. Again Robinson (1989) feels that inheritance should be taxed more heavily so as to ‘shift the burden away from earned and investment income and towards wealth so that income can be more lightly taxed'. Lee (2007) agrees that IHT is easily avoided, she states it is a ‘voluntary levy' that ‘favours the healthy, wealthy and well advised since with a certain amount of foresight and planning it can be avoided'. Like Robinson (1989) she feels the ‘nil rate band' (which is currently set at £325,000, Appendix C) should be increased or the ‘main residence' should be exempt although she does admit that this could ‘encourage individuals to invest more money in their home rather in other more useful assets' which could be worse for the already struggling economy as it discourages investments in companies.

A main argument surrounding IHT is that it reduces people's incentive to save, as Heer (2001) identifies ‘if people are motivated to accumulate savings by the idea of leaving their families an inheritance, a tax on bequests reduces the returns on savings' Duff (1993) disagrees he feels ‘the desire to save solely for the purpose of making bequests is probably slight compared to other reasons such as saving for retirement, security and independence'

‘A tax on widows and orphans' west 1893


‘Inheritance is nonworking income, inheritance would reduce the number of hours worked and reduce production' (Nissim, 2007)

‘Inheritance involves a relationship between the person doing the bequeathing and the inheritor and we treat this desire to bequest as belonging to the living person, the donor' (Trout and Buttar, 2000)

‘because the most efficient distribution is the one that helps most those whose needs are greatest, and because inheritance is the most direct form of privilege, surplus owing to inherited should be redistributed to address basic needs' (Trout and Buttar, 2000) basically what they are saying is that inherited wealth is a ‘privilege' because it is just handed to an heir and is not earned through hard work. Duff (1993) agrees stating that ‘beneficiaries have a greater taxpaying capacity since they have no prior expectations' the money did not belong to them and they never had it to start with so they shouldn't miss some of it that is taken for tax purposes. They are not losing anything because they never had anything to start with.

Duff (1993) feels the best reform would be to make IHT an accessions tax, that is a progressive tax on inheritances received by the recipient taking into account all ‘lifetime gifts and inheritances received'

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