Is Inheritance Tax fair?

By Zvonko Matovski

On Monday, I posted a comment on an article by Julian Ware-Lane. Part of my response related to the subject of Inheritance Tax.

Emma Burnell responded to my post by saying that £350,000 (the tax-free threshold from 2010) is enough of a legacy for a parent to leave their offspring. But isn’t “enough” is a relative term?

Let me elaborate by using an example of two fictitious people. Let’s call them John and Jane.

John is an only child living in a small town in the north of England. He inherits £350,000 tax free from a parent. This is “enough” to buy two houses outright.

Jane lives in London. Her parent is also able to leave £350,000 tax-free. However, as Jane is one of three children, the Government will only allow her to inherit £116,666 tax-free. Not “enough” to buy even half a flat in London.

The socialist argument says, “Why should someone, through accident of birth have an advantage over other members of society.” But in this example, this is exactly what is happening. John, through accident of birth is an only child, and has the advantage of inheriting three times more tax-free, than Jane and her siblings. Being born in a less expensive part of the country is also an accident of birth, giving him twice as much buying power in the housing market.

Due to the increase in house prices, many in southern England will leave estates exceeding £350,000, and consequently liable to pay IHT. The argument from the left is that the increase in value is unearned, and therefore should be taxed. However, what is often forgotten by this argument is that whilst a property may have been bought for say £200,000, the total mortgage payments will have amounted to roughly £400,000. In addition, the householder will have spent a considerable amount of money on maintenance, repairs and improvements during those 25 years. As the income used to pay the mortgage, and the additional maintenance and improvements have already been taxed, is it fair for that home to be included as taxable inheritance? Shouldn’t we only tax amounts over and beyond the amount paid?

So to ensure fairness, should we change the system so that the each individual can inherit a specified amount, tax-free? But wouldn’t that make it unfair to John’s parents? Why should they be punished for having only one child?

Should we determine the tax-free allowance based on the cost of housing in various parts of the country? But wouldn’t that give people living in the south-east an unfair advantage?

If the socialist answer is to put everyone on an even playing field, should all assets go directly to the government, and be distributed evenly amongst all citizens? If that were the case, surely many people would see no reason to accumulate any kind of wealth in the first place. Either that, or they would ensure they spent it all before the government could get their hands on it. Under those circumstances, would there be anything for the Government to divide up?

So what’s the answer? Is there a fair way, where no-one will complain?