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Cheapside Debate On Inheritance Tax

March 4, 2008

Northern Rock & Banking Reform

Mark contributed to one of St Mary le Bow Church’s Cheapside Debates. He argued the case against inheritance tax and raised his concerns about the tax treatment of non-domiciled residents. His opponent in the debate was Will Hutton, Chief Executive of the Work Foundation and former editor-in-chief of The Observer.

A shadowy, powerful but generally respected place when Gordon Brown was Chancellor of the Exchequer, in the past six months the Treasury seems to have come under fire more regularly than at any period in this government’s eleven year reign. With the Northern Rock debacle, the incompetently rushed Pre-Budget Report, the lost discs of data and the acquisition of the inheritance tax issue from the Conservatives, the Treasury seems to be reactive rather than making the economic weather. Its attempts to take back control through ill-advised proposals on capital gains tax and a retrospective tax on non-doms, have resulted in embarrassing climbdowns.

This is regrettable. Erratic and superficially-considered policies on both inheritance tax and the taxation of non-domiciled residents represent two big missed opportunities to tackle perceived injustices in the system. In each case, a need to fund the government’s colossally expensive spending plans has highlighted the fact that the superrich are making a less than fair contribution whilst full burden falls unduly on those on middle incomes. The resentment and sense of unfairness, particularly in the capital, is becoming palpable.

Last autumn, the Conservatives’ promise to slash the burden of inheritance tax revealed the politically explosive nature of the debate over death duties. The conference announcements made by George Osborne to raise the IHT limit to £1 million apparently swung the polls to such an extent that the Prime Minister was dissuaded from calling an early election.

My opposition to inheritance tax predates my entry to parliament but until recently my Conservative colleagues were so keen to disassociate themselves from any accusation of protecting the interests of the rich and privileged that many went along with the outdated view that IHT is paid only by a wealthy minority. Thankfully, the autumn saw our leadership brave the worst kind of class war rhetoric to raise this important issue again.

By playing on the new-found popularity of the IHT issue revealed by the Conservatives, Chancellor Alistair Darling managed to grab some cheap headlines with his Pre-Budget Report whilst effectively changing very little. He announced he would be raising the inheritance tax threshold for couples, allowing them to jointly pass on £600,000 of their already-taxed money to their loved ones without being taxed another forty percent. However each individual in a married couple already had a personal allowance of £300 000 before IHT kicked in and most couples were able to reap the advantages of a £600 000 joint allowance through the careful rearrangement of house deeds and the setting up of wills and trust funds. The Chancellor’s misleading announcements demonstrated a disappointing failure to do more for those affected by this charge on death.

Death duties have been with us in the UK in some form or another for over two hundred years. The common perception has always been that it is a levy on the very wealthy, affecting relatively few people. The £3.6 billion it raises for the Treasury from the 6% of estates it touches in fact represents little more than a week’s spending on the NHS. The reason its revenue is so small, however, is not simply down to the proportion of people it affects. It is because the truly wealthy are able to employ innovative taxation specialists to advise them on every last loophole or simply relocate to live in a more favourable tax regime, leaving the burden to fall predominantly on those of moderate income.

The sharp rise in house prices in recent years has pushed many more hardworking families over the IHT threshold, making the tax one of the most unpopular and unfair now levied on the public. Any homeowner in my own constituency is now likely to be affected and I have in fact received correspondence from constituents who fear that they will now have to sell their family home to pay the taxman after a partner’s death. One constituent in her eighties who wrote to me had lived all her life with her sister in their London home. When either she or her sister dies, their property will have to be sold as they will not benefit from the Chancellor’s new £600 000 joint allowance. These are not rich people.

In 1997 there was only one town in the UK (Gerrards Cross in Buckinghamshire) which had an average house price higher than the inheritance tax threshold which then stood at £210 000. Anyone living in the capital knows that £300 000 will now only just about buy a two bedroom flat in East London or the smallest of studios in Westminster or the City. The rise in house prices is so significant that the number of estates paying IHT has doubled over the past decade.

Conservative, free-market arguments can be employed to make the case for inheritance tax. The more wealth that people inherit, the more likely they are to quit the labour market. There can be unintended legacies as well as intentional bequests which, as they are unplanned, would be unaffected by IHT. The cost of abolishing inheritance tax could increase tax in other areas which would be more harmful in reducing the incentive to work than IHT. And so on.

These arguments would have some weight if we were talking solely about the inheritance of wealth from the extremely wealthy. However, today we are no longer talking about such groups. The sums that people would inherit were they not affected by IHT would in most cases not be huge and certainly would not make the inheritor so rich that work could become optional. We are talking about people who will have to sell their family homes to stump up the cost of the levy. As such, it is clear that inheritance tax is no longer serving its purpose to prevent the entrenchment of significant wealth for the few.

I can think of nothing more offensive to those who have worked and given great service to this country than for a large proportion of their already-taxed, hard-earned money to be confiscated by the government at the end of their lives. Nothing is more significant to many parents from all income levels than that they leave ‘something for the kids’. The aggressive way in which the Chancellor and his predecessor have ironed out loopholes and pursued all forms of inheritance is invasive and represents the state’s intrusion into the lives of yet more people who have worked hard, played by the book and have never burdened the state. As former Labour minister, Stephen Byers said himself, inheritance tax is ‘a penalty on hard work, thrift and enterprise.’

This tax not only needs to be reviewed more thoroughly than the government has already done but I believe there is a serious case to be made for scrapping the levy entirely.

Just as the middle classes shoulder the burden of inheritance tax so there is a growing sense, particularly in London, that they have paid an unfair cost for the influx of wealthy non-doms into the UK. Not only do I believe inheritance tax must be abolished but I think it is time to return to the broader debate over the desirability of allowing internationally mobile, high net worth individuals to avoid making any contribution to domestic income tax.

As an inner-London MP, I have watched the influx of overseas money distort house prices and the cost of middle class living to the severe detriment of many indigenous Londoners. This group is beginning to feel that they are more than paying their way in collective taxation yet at the same time are witnessing a market diminution in the quality of their life. This unease is not a throwback to the politics of envy. Far from it – here is an aspirational, meritocratic group whose resentment is being stoked up by a perception of fairness.

The two issues of inheritance tax and the taxation on non-doms have been linked in people’s minds partly because the Conservative Party proposed funding the cut in IHT with a £25 000 flat charge on non-doms who wished to keep their income offshore. The non-doms debate has followed hot on the heels of that over the preferential tax rates enjoyed by those working in private equity. It is essentially a middle class revolt over the unequal rewards to labour. To their surprise, many highly educated professionals working outside the gilded corridors of the financial services sphere see themselves as losing out as the world becomes more integrated and interdependent.

The worrying level of overdependence on the financial services sector for the nation’s economic wellbeing makes some action over non-doms desirable. I welcomed the recent climbdown by Chancellor Darling over his ill-advised non-dom tax proposals. Retrospective taxation is invariably unjustified and the intrusive demands for details of overseas earnings and the uncertainty heralded by the government’s draft legislation in this area risked undermining the UK’s international competitiveness.

However, I have noted with concern the shape the debate on non-doms is taking. The prospect of less clement economic weather, especially in the financial services sphere, has led many commentators to question the wisdom of any tariff being imposed on non-doms. Once the argument is accepted that a sector, and its participants, are so important to this nation that they should be exempt from paying a share towards the communal income taxation pot, where do we stop?

It is, of course, worth stressing that even high net worth non-doms contribute extensively via council tax, VAT and employment taxes on their array of staff to the Treasury. It is their status that exempts them primarily from taxation on their overseas earnings. I should also point out that the great majority of those non-domiciled in the workplace are relatively modestly remunerated. For them a flat rate charge amounts to a substantial imposition on their overall earnings. But it is rarely from this quarter that any vocal complaint has been forthcoming. By contrast, in my own role as the MP for the Square Mile, I have been feverishly lobbied by leading financial services players, doing their best to convince me that anything beyond the status quo would result in a non-dom exodus of the job-creating super rich from London to the cosmopolitan delights of Geneva or Frankfurt.

This I simply don’t buy. For a start, the attraction to high net worth non-doms – and their families – of residing in London is probably worth paying an annual tariff of rather more than £25,000. Furthermore, if the levying of low – to the point of zero – taxes is so essential to job creation in the City, why is the case for lower, more internationally competitive tax rates for all not being made much more forcefully? It is surely essential that the case for reducing levels of taxation should apply across the economy, not just to a gilded few, whose special pleading all too often sounds like thinly disguised blackmail.

The aggregate sums that stand to be raised by an annual charge along the lines currently proposed (working on the assumption that none are persuaded to return home) are negligible. Meanwhile no one disputes that we cannot, and should not, kill the financial services goose that lays such a golden egg to UK plc. The prospect of non-doms being seen publicly to ‘pay their way’ will help assuage many of these concerns without careering towards fully fledged protectionism.

It is time we gave those on middle incomes a little more help. It is already clear that political discourse in the United States is heading in precisely this direction. Two of the four contenders left in this autumn’s presidential race, Barack Obama and Mike Huckabee, eagerly position themselves as siding with the ‘little man’ against the apparently unstoppable forces of globalisation. I firmly believe that we have not heard the last of this theme.