David Alexander comment: Dodgy inheritance of think tank’s IHT scheme

Even in the days when Labour was a sensible, middle-of-the-road party, time at annual conference was still reserved for debates over some fairly wild resolutions.

I cannot find any justification as to why personal assets should be taxed further, says Alexander. Picture: contributed.

Happily the party hierarchy, majority of MPs and the trade union block vote managed to ensure they were never passed, or at least sent for “further discussion” – effectively pigeonholing them indefinitely.

Nowadays, however, wild proposals are no longer the reserve of the party’s radicals but come from the very top – eg that from Shadow Chancellor John McDonnell, who in a recent interview hinted Labour might adopt a policy of giving tenants the “right to buy” their privately rented homes – and at rates set not by the market but rather some government quango.

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As this column noted recently, should such a proposal become law it would devastate the private rented sector and do great damage to the wider economy with its implicit attack on “property rights”.

Now, just when I thought things could not get any worse, comes another radical pop at the property industry via changes to inheritance tax (IHT) contained in the Institute for Public Policy Research (IPPR) paper Thinking bigger on tax in Scotland.

The IPPR describes itself as a “progressive” think tank, which some might consider “progressive” in this case being radical left-wing. Its proposal is to charge either a flat rate of 10 per cent on all estates valued at £36,000 and above – which would bring in £200 million to national or local government– or to use the UK IHT system set at a 20 per cent marginal rate, raising £300m a year.

Either way, the homeowner pays. And as most people’s largest asset is their home, it does not take a genius to work out that the proposal to set the IHT threshold at £36,000 would negatively affect virtually all property-owners in Scotland.

Extensive personal and professional experience has taught me that people rarely start off as homeowners specifically thinking in terms of long-term investment. Their main motive is ownership of the place in which they want to live and raise a family and the freedom (within reason) to adapt or enlarge it to their own tastes.

Nevertheless, the equity built up with paying off a mortgage over 25 years or more is still an incentive as it leads to further options in later life – e.g. downsizing to raise cash or “passing on” the home to their adult children. Basically, I cannot find any justification as to why personal assets, bought with income already taxed at source, should be subject to further taxation after the owner has died.

Sadly, however, IHT is a fact of life and the rise in property values – coupled with the “starting” rate not having been increased for a decade – is pulling more and more “ordinary” families into the inheritance tax net. Under the IPPR proposals, avoidance will be the prerogative of only the super-rich.

Given that Scotland already taxes everyone earning above £26,993 a year at a higher rate, and charges substantially more through land and buildings transaction tax to buy a house than the rest of the UK, this policy would further alienate homeowners already living here.

More widely, the report effectively targets ambition and will be a further disincentive to anyone – particularly entrepreneurs with the ability to create jobs – thinking of relocating to Scotland by increasing the already widening tax gap between this country and the rest of the UK.

Why would anyone invest in, for example, East Lothian, when just 50 miles away in Northumberland the tax regime will be so much more welcoming? Rather than policies which, superficially, increase revenue, local and national government would be better served developing attractive, fairer and more welcoming tax regimes.

As has been proven, raising tax levels does not automatically result in greater revenue. Our First Minister recently reiterated that Scotland was “open for business”. If this is the case then her government will put the IPPR report where it belongs – in the wastepaper bin.

David Alexander is MD of DJ Alexander