Middle class is made to pay too high a burden

Share this article

I OFFER you the first public outing of Blundell’s Law: all legislation achieves the opposite of what was intended.

Look at inheritance tax. Those who devised it and those who voted for it thought they would be hitting the seriously wealthy. If a man dies with 100 million it is easy to understand why somebody might feel it reasonable to cream such opulence. Understandable but wrong.

For inheritance tax entirely avoids hitting the wealthy. It hits the middle classes - and mostly those confused in their old age. The 2003-04 threshold is a footling 255,000, after which Chancellor Gordon Brown takes a whopping 40 per cent. There was a time when such a sum was indeed a badge of great affluence. Now it is no more than an ordinary house with one or two life insurance policies.

Inheritance tax does not leave the rich dazzled in the headlights of their own mortality. They take evading action. Inheritance tax actually makes the rich richer. It also leaves lawyers and accountants and insurance brokers refreshed as they tender their advice. That great economist Arthur Seldon invented the new word "avoision". It is the fine line between "avoiding" taxes, which is legal, and evading taxes, which is unlawful. The inheritance tax has created a whole avoision industry.

Anyone with seven-figure-sum estates will set up trusts, transmit assets while alive, shift money off-shore or develop other tactics to keep the money from the Inland Revenue. Meanwhile, those with incomes little more than their pensions and their family homes, bought 30 years ago, find themselves being clobbered.

The tax has ossified. The notion of milking the rich was always wrong-headed. Yet now it hits the elderly and frail who merely intend to pass on their modest estates. They have no idea that they are going to be trapped and, even if they did, often have no idea of how to avoid the 40 per cent bite.

If you speak to politicians, they shrug and merely suggest index-linking the threshold to the RPI - not to any barometer of housing prices. The only enlightened policy is to scrap the tax. Australia and New Zealand have done this to wide acclaim. Inheritance tax is a poor device to raise revenue. It harvests relatively modest sums - half of which are consumed by the Inland Revenue in its inspectorate and assessment policies.

We want wealth to fall down from father to daughter, from mother to son. Adam Smith, sagacious as ever, wrote: "Every frugal man is a public benefactor." Savings are not something to be punished. The state should abandon this malignant Jacobin Leninist idea. It belongs to the fringes of politics, warming the cockles of the likes of Tommy Sheridan.

In his penetrating study of inheritance tax Euthanasia for Death Duties, Dr Barry Bracwell-Milnes argues that penalising capital demoralises and depletes the rest of the economy. In a horrible paradox, he reveals inheritance taxes promote trivial expenditures rather than investment. How many thousands take unwanted world cruises simply because "we can’t take it with us"?

Studies show many perfectly healthy family firms never survive the death of one generation because of the incidence of a tax that regards successful trading and the building up of a small business as deserving of punishment. Measuring the damage done by a duty on death is far more oblique than adding up the taxes collected.

In an uncharacteristic moment of boldness back in 1995, John Major mooted the abolition of this cruel tax. His chancellor, Kenneth Clarke, was opposed and settled for the illusory RPI-indexing formula. Since then, the Tories, fearful of being caricatured as the friends of the wealthy, seem to have dropped the thought.

How many people in Edinburgh and its hinterland will die with assets above 255,000? The Sheriff Clerk’s Office suggests it is heading for one half. Inheritance tax is not a Robin Hood venture. It only enriches the already opulent or cajoles them into expenditures. It is a Sheriff of Nottingham notion. It punishes the middle classes. I say scrap it.

Here is the arresting claim: the Treasury would win far greater income if it let families retain their assets. Heirs can only do two things - invest or spend. The Revenue should tax the living, not the dead.

John Blundell is general director of the Institute of Economic Affairs.