Of all the great intractable debates of our time (toilet roll over or under, jam or cream on your scone first…), the “right amount” of inheritance tax will surely be the last to be resolved.
One side takes the position of: “It’s my money, I’ve already paid tax on it at least once, why do they get to tax it again?”
The opposing argument is: “The tax system needs to level the playing field, otherwise inequality will compound over generations. Some people will inherit nothing; others will inherit millions. By taking a slice, the tax can be used to help those who are less lucky.”
It’s hard not to be sympathetic to both of those views.
However…
It struck me the other day that what we have in the UK isn’t actually an inheritance tax at all – it’s an estate tax. This means that the “estate” of the person who died is taxed, then whatever is left over can be passed on. (It’s the same in the US.)
You can see why this makes HMRC headquarters the most haunted building in the country (I imagine).
But what if you allowed all someone’s money to be passed on tax-free – then the recipient pays tax on it like they would any kind of other income?
That goes some way to overcoming the “it’s my money” objection… because by that point, it isn’t. It then doesn’t seem unreasonable to say that the recipient should be taxed on it just as they would be if they earned it. Indeed – if they weren’t, you could see it as unfair on those who work for their money.
There are probably all manner of issues with that way of doing things, and I don’t pretend to have fully thought it through.
Regardless, within the current system, the best way of swerving the whole issue strikes me as being the Die With Zero approach: give a defined gift at a defined time (such as enough for a home deposit when they turn 30) rather than leaving it to chance.
That way the gift potentially has more impact (the average age to receive an inheritance in the UK is 61!), and it’s hopefully well out of your estate by the time you croak.
(By the way: the correct answers are “over” and “jam first”, obviously.)