The silly idea to ban inheritance tax.

The Guardian, as well as other national newspapers, tell us that Sunak, the British Prime Minister, is considering abolishing inheritance tax – I think this is a silly idea.

Inheritance Tax is a tax on gifts and the assets you own on death. The tax needs to be paid before a grant of probate is issued, so it is paid before any other beneficiary.

It is a well-crafted tax, with reliefs available for business assets and agricultural property. This enables businesses and farms to pass them on to the next generation intact, which is advantageous. There is also a 100% exemption for transfers to a spouse so that his or her lifestyle can be maintained after the death of the husband or wife – again, this is good.

Philanthropic gifts are also exempt to encourage us to give to charity – again, a sensible provision.

There are also complex rules around trusts that vary according to the type of trust.  However, over the years, these rules have changed, so there is now virtually no benefit to using trusts for tax planning. The only exceptions are to use a trust for a surviving spouse so they don’t blow it, leaving nothing for the kids to inherit or providing for grandchildren under 18.

I accept that the tax is an unfair burden on people who have saved during their lifetime to provide for their old age, and these savings have all been charged tax, whether income tax or capital gains tax. The rate is also very high at 40% on any value in your estate over the first £350,000. For many, it is onerous to be taxed again on monies which have already been taxed – but tax is not just about being fair – it has never been – it is also about incentivising and encouraging desired behaviours.

Within the inheritance tax legislation, there is a very prudent seven-year rule. If you give your wealth away to your children, grandchildren or to charity more than seven years before you die, it escapes tax.

This is a good provision because it encourages wealthy people to give their wealth away when their children have left home and downsize.

Andrew Carnegie, the great industrialist and philanthropist, wrote much about wealth. He famously said ‘that the man who dies rich dies disgraced’ and he has a point.

Children need the bank of Mom and Pop when they start in adult life and want to build a home and raise a family – It is not needed so much when the parents die when they are probably in their forties and fifties with grown-up children.

If the bank of Mom and Pop has more than enough to give the kids a good start in life, it should then be used for philanthropic purposes, but not when they are dead – because they cannot then ensure that the money is used well and delivers a bang for the buck.

Andrew Carnegie was not born rich. He grew up in a small cottage in Dunfermline but became one of the wealthiest people the world has ever seen. He built railways and developed communication lines during the American Civil War. He then built up a colossal steel business.

When he sold the Carnegie Steel Company for $480 million, he used the money for his philanthropic projects, such as building libraries.

If Andrew Carnegie were alive today, he would campaign to increase the inheritance tax rate – not decrease it!!!

Let me know what you think.

Caroline Garnham October 2023