Should you try to keep hold of your cash after your death?

http://www.theguardian.com/money/2015/sep/15/should-you-keep-your-cash-after-death-inheritance-tax

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It seems that you can’t escape the taxman, even in the grave. Some say inheritance tax (IHT) creates a fairer society; others that it goes against the basic human instinct to provide for those who come after. So should you try to keep hold of your money after death? We asked two experts for their view – tell us what you think below.

NO, says Dr Rajiv Prabhakar, lecturer in personal finance at the Open University:

“Dead people don’t do much. Certainly, they don’t worry about their tax bill. But to the living, the issue of whether someone’s wealth should be taxed after they’ve died is a contentious one.

Strip away the emotions involved and there are powerful arguments for taxing wealth after death. Equal opportunity is the key here. In the UK, wealth is more unequally spread than income. The Equality Trust’s wealth tracker, published in April, shows that in the UK the richest 1,000 families have more wealth than the poorest 40% of households combined. If inheritances are untaxed, then only a lucky few can enjoy the advantages of wealth. The vast majority of people will be left out of life’s lottery.

Of course, a desire to pass wealth on to your loved ones is a natural impulse. Chancellor George Osborne drew on this in his July 2015 budget when he announced changes that would allow couples to pass on residences worth up to £1m untaxed. This is framed as taking the “family home” out of IHT. But accepting this motive does not mean that all wealth should be untaxed. Some people worry that taxing an estate might be a disincentive to save. But receiving an inheritance might also be a disincentive to work hard. Andrew Carnegie, often described at America’s first industrial titan, recognised this as far back as the 19th century when he argued that inheritances undermine the work ethic.

Critics complain that IHT is “double taxation” – taxing assets that have been paid for, out of income that has already been taxed. But double taxation is everywhere. If you buy petrol with your hard-earned income you pay fuel duty; if you buy something from a shop you may pay VAT.

There is a strong case for reforming IHT in the UK … there are loopholes people can exploit to avoid paying

The amount raised from IHT is small. Official figures suggest that for 2014-15, IHT contributes less than 1% of total tax revenue received by HM Revenue & Customs. But this is the direct result of design. Other policy choices would yield other results. In times of austerity, taxing inheritances have at least two advantages: first, it provides a possible extra source of revenue for public spending; second, it would be levied on those who could afford it the most.

What ought an ideal tax look like? There are a range of options, but there is a strong case for reforming IHT in the UK. The current IHT is a misnomer, as what is taxed is the final estate rather than the amount a person inherits. There are also loopholes in the system that people can exploit to avoid paying. There is a case for taxing wealth transfers more generally, whether it’s a gift from a living person or an inheritance after someone has died. Recent proposals for a lifetime wealth transfer tax are contained in a well-regarded review of taxation chaired by Sir James Mirrlees at the Institute for Fiscal Studies.

Should you try to hold on to all your cash after death? In my opinion, on balance, no. Taxing inheritances is a fair way to redistribute wealth in our society. The question is not whether we should do it – but how.”

YES, says Adam Memon, head of economic research, Centre for Policy Studies:

“YouGov polling shows that of 11 major taxes, IHT is seen to be the most unfair by people across the political spectrum. And that’s no surprise: people work hard throughout their lives to provide for themselves and to look after their families. They do the right thing by saving for their children and grandchildren and are then punished for it.

IHT is justifiably unpopular because it strikes at our basic human instinct to want to look after our loved ones when we die. When it comes to tax policy, it goes against the grain to demand payment from someone in mourning and prevents us from doing what we want with our money at the end of our lives.

Let’s remember that IHT is not levied on some magic pot of money at the end of the rainbow. Rather it’s more likely to be what’s left after income tax, capital gains tax and dividend tax. What’s more, if all the value of the estate is tied up in a family home then things can really start to get tricky, and it may not be long before you have to sell up just to pay the tax.

The super-rich, by and large, are making the most of our hideously complicated tax system to reduce their tax bills

What is so outrageous about IHT is that its supporters sell it as a tax that only hits the super-rich. They point out that even in 2020, only 11.6% of deaths will be subject to the tax. It isn’t as simple as that. The unfairness of the tax is compounded by its sheer complexity. There are 91 separate IHT reliefs that open up a whole series of avoidance opportunities. This means that 40% of all estates worth more than £1m pay no IHT at all, even though the threshold is set at £325,000. So if you think it only hits the super-rich, you’re wrong. The super-rich, by and large, are making the most of our hideously complicated tax system to reduce their tax bills.

The IHT system also means that simply owning a house in central London is likely to lead to a 40% tax. However, some of the wealthiest people in the country who own huge areas of land can get away with paying absolutely nothing because of the reliefs they can claim. That is neither fair nor efficient. There are, frankly, far better ways of promoting social justice than relying on the clunky, illogical, unfair IHT system.

Some argue that a higher IHT may encourage the recipients to stay at work because they are less likely to retire early. This isn’t a particularly good economic argument. The windfall from an inheritance is a vital source of funding for many smaller businesses. A higher IHT means a smaller pool of capital, with less available for investment.

Surely, a far better idea would be for the government to radically simplify the IHT system and phase out the plethora of reliefs, the gains of which seem to be accrued largely by the very wealthiest.

Should you try to keep hold of your cash after your death? Yes. It’s your money – you should be able to do what you want with it.”