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INHERITANCE tax is the last of the old class-based taxes. In the days of Asquith and Lloyd George 100 years ago, estate duties were seen more as a way to attack the economic power of the landed aristocracy than to finance public spending efficiently. Income tax and property rates, which were once levied on the few, have long since become mainstream taxes on nearly all families. Whether it was called estate duty, capital transfer tax or just death duty, tax on inheritance has remained much the same. It is a dinosaur tax.

Successive Chancellors, including Gordon Brown, have proudly reassured voters that they are unlikely to have to pay. To keep that boast, they have raised the tax-free allowance disproportionately to 57 times the annual income tax allowance.

Only 4 per cent of estates pay anything. For that reason, most people do not seem to care that inheritance tax is levied at a swingeing 40 per cent basic rate. For the same reason, most of us do not mind that most of the truly rich make sure that their heirs pay no tax at all or only a tiny proportion of the intended levy. The tax is so punitive that it seems fair game to avoid it.

Chancellors of all parties have had to admit that the tax would inflict severe damage on enterprise, particularly on family firms, if they were not let off. Two generations of these businesses were squandered in the process. Allowances and exclusions brought in to limit the damage have created the tax shelters, or loopholes, that keep takings down to about £2.5 billion a year. People distort the use of capital and even exile themselves to keep the family fortunes intact. Mr Brown' s attempts to plug loopholes, for instance by stopping people giving away their houses but continuing to live in them, seem needlessly cruel.

The share of inheritance tax in total tax revenue has fallen by two thirds in 30 years. As a rough guide, a 5 per cent levy on the nation's wealth, once per generation, should yield three times as much as the 40 per cent tax actually does.

However tasteless the idea seems, inheritance on death is a transaction. Why should it not be taxed when someone earning less than £100 a week is liable to pay income tax? High rates of home ownership and rising property values have at last spread wealth to most families, once the mortgage is paid off. The time is coming when death duty should become a mainstream tax for all, like income tax; when it could help to relieve pressure on overstretched levies such as council tax.

For that to happen, however, inheritance tax needs to be rethought. Edwardian ideas of social engineering should finally be buried with discredited Marxist tracts. Death duties should be redesigned to raise large amounts of revenue without punishing saving or prudence, or undermining proper family sentiments.

Booming house prices are acting as a catalyst. Millions of families in newly fashionable city centres, prosperous suburbs and historic market towns see themselves or their children becoming liable to 40 per cent marginal tax and rightly think it an outrageous penalty for struggling 30 years to pay the mortgage. It seems to destroy wealth, not to tap it on behalf of the community.

This property-rich generation is the equivalent of the aspirational new-town families who stopped Labour being elected in 1992 because they rejected a return to taxes of 50 per cent or 60 per cent on incomes. Like those yeomen of Essex and elsewhere, many are looking ahead to a time when they may be liable to such ridiculous tax rates.

To the Blair camp, unfortunately, this is simply a political problem: how to avoid alienating uncommitted voters. Ministers' pathetic response to calls for reform of local council finances was to make council tax more progressive, so that most families saved a tiny amount while those living in expensive houses paid a lot more. The Institute for Public Policy Research has come up with a similarly feeble formula for death duty "reform". If a lower rate of rate of 22 per cent were levied on the first £25,000, ministers could claim that this was the rate most chargeable estates would pay. A rate of 50 per cent would be brought in for legacies of more than £500,000, however, to make good the revenue loss and squeeze out a further £150 million a year.

The IPPR says: "(The tax) gives an easy win to middle income groups and lays in place a structure which, if desired, could be incrementally tightened through fiscal drag."

Earmarking some of the extra for helping disadvantaged children would "justify the tax by linking it to a popular spending programme". Those who noticed that many of the truly rich were still paying nothing might not easily be convinced.

Tax policy does not need to be so cynical. A tithe on all estates above a minimal level ought to raise up to £10 billion a year, up to four times the current revenue. Most people might think a 10 per cent tax fair and acceptable if it were levied only once a generation and, crucially, if everyone had to pay it.

Inheritors ought to be able to make up 10 per cent without having to dissipate their inheritance or lose the family home. So virtually all the tax shelters could safely be abolished, other than safeguards against double taxation. Inheritors would be able to borrow against assets to pay the tax or be allowed to pay in instalments at a modest interest rate. Some of the super-rich would still pay smart lawyers to avoid the tax but few would endure painful contortions to avoid 10 per cent.

A new tithe could be simple, fair and productive. The problem is getting from here to there. It might take ten years and need political consensus. Unless a left-of-centre Cabinet made the change, the rich would not trust the new settlement to last. That is the challenge for a reform Chancellor.

For advice on how to minimise inheritance tax,or income tax please complete the online enquiry form.

Your enquiry will be forwarded to specialist tax planning solicitor, Emma Guardern who can investigate ways of ensuring that as minimal amount of tax as possible is paid during your lifetime.

For further information about inheritance tax and other private client issues, please visit the firm's Private Client area.

 

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