15.4. CONCLUSIONS
The arguments against taxing the normal return to life-cycle savings do not apply with equal force to the taxation of bequests and other transfers of wealth. There may be a particular case for taxing inherited wealth on equity grounds. Yet the current system of inheritance taxation in the UK is something of a mess. Its notable failings are largely to do with the fact that it is half-hearted and hence fails to tax the wealthiest.
By taxing transfers only on or near death, it allows the richest to organize their affairs to avoid taxation. Only those with very large amounts of wealth can afford to give most of it away several years before they die. And by exempting business assets and agricultural land, IHT creates distortions that have no economic justification and promote avoidance among those who can engage in tax planning. As Kay and King noted in 1990, inheritance tax favours ‘the healthy, wealthy and well advised’,28 and nothing much has changed in the 20 years since then to affect that judgement. Few can aspire to be rich enough to avoid inheritance taxation, but many aspire to wealth levels at which they would end up paying it. As currently structured, it therefore resembles a tax on aspiration.
It is not so surprising, therefore, that IHT is unpopular. Some countries have responded to similar concerns by abolishing their inheritance and transfer taxes altogether. Such responses inevitably make the retention of such taxes in other countries more problematic (in particular in the form adopted by the UK), given the increasing mobility of those who might otherwise find themselves subject to such taxes.
We do not believe the UK should move towards abolition. It is not required by the dictates of efficiency; nor is it justified in the face of great, and growing, inequality in wealth. But while there is a case to maintain some form of tax on inherited wealth, the argument for leaving things as they are is weak.
Whatever else is done, forgiveness of capital gains tax at death should be ended. As a way to offset the impact of inheritance tax, it is poorly targeted. But, in any case, no choice of a tax regime for wealth transfers justifies creating the bizarre distortions to asset allocation decisions that this policy does.
A minimal reform to inheritance tax itself would be to maintain it in more or less its current form but to widen its base to include business assets and agricultural property. There may in addition be a case for levying it at a lower rate than 40%, at least on an initial tranche of assets.
But the biggest barrier to the effective working of inheritance tax as it currently stands is that it is levied only at or close to death, allowing the wealthy to avoid it altogether by the simple expedient of passing on wealth well before they die. Put this fact together with the logic of such a tax, which suggests that a tax on the recipient makes more sense than a tax on the donor, and the case for a tax on lifetime receipts looks strong. That case does need to be balanced against the practical difficulties of implementation. Such a tax would have to depend on self-assessment. There may be particular issues arising from international mobility. But a movement towards a tax on lifetime receipts would be more defensible than the current system, both on grounds of fairness and on grounds of economic efficiency. The present halfway house simply provides ammunition to the abolitionists.
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