Inheritance tax (IHT) is a subject which usually divides people into two camps. The first group takes the view that IHT is evil; people have already paid enough tax during their lifetimes, whatever they leave behind on their deaths has been taxed already, so paying any additional tax on death is just unfair.
In contrast, opponents of this view are often motivated by negative feelings towards the first group, or the wealth they have, and think that the government should take it off them and/or redistribute it to others who for whatever reason are less well off.
So it is difficult to get people to stand back from the issue and look in principle at what is going on with IHT.
The complication is that while we are alive, tax is in general charged on income or profits, yet once we shuffle off this mortal coil, IHT is charged on capital, being what our after-tax income and gains becomes.
There is more sympathy for the first view expressed above on a general level when it comes to the ordinary working man made good, particularly on the right of the political spectrum. But this argument against IHT disappears (in the eyes of those on the left) when someone dies who has simply inherited great wealth without ever having to work for it.
If the purpose of IHT is to tax capital, the state already recognises that there must be a limit to it by the existence of the personal allowance, currently £325,000 per person.
Nevertheless it feels able to take 40 percent of the excess above this amount (although this can usually be deferred until the assets pass down to the next generation), and feels more justified in doing so the richer the individual or family concerned. Why, the argument runs, should a (multi)millionaire be able to keep everything, when there is such inequality in society?
So is there a middle way which could carry an overall stamp of "fairness", and satisfy critics on both ends of the spectrum? I think there is. If we think work should be rewarded, especially where in his or her lifetime an individual has paid every tax going, then we should give a work-related exemption where IHT is concerned.
As an example, we could provide that for every year that someone has been in employment, their IHT bill will be reduced by 1/40. So for someone who works continuously from 20 to 60, he or she would pay no IHT, as he or she would have paid 40 years' worth of income tax.
Alternatively, you could receive a total credit against IHT for all the income tax you have ever paid on employment income. There would therefore be a clear incentive to work; the Treasury would benefit through income tax receipts; and the culture of work is promoted by our tax policy.
Unless redistribution is all, why would anyone object to this? The individual with his or her trust fund, who has never had to work and whose wealth has come solely from inherited wealth and the income it generates, would not benefit from the proposed IHT exemption, whereas an ordinary person who works hard and does well would.
I don't say that there aren't problems with this approach or that it takes account of every conceivable set of circumstances that might arise, but revising IHT in this way would at least send out a powerful signal to society that, if you work hard and pay your taxes as you go, you and your family will benefit as a result.
This article was originally written for The Commentator
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