Mark Hopper, Head of Legal Services at Chesterton House, shares his thoughts on the origins of Inheritance Tax and the implications for people today.
Inheritance tax as we know it began in 1894. Back then a net estate of £100-£500 had to pay tax at 1% with rates gradually increasing up to a top rate of 8% for estates over £1,000,000. This progressive increase in the rate of tax (‘graduation’) was a source of controversy and debate amongst some heavyweight figures of the time:
"I do not object to the principle of graduated taxation...But.. I find it too violent... For the sudden introduction of such change there is I think no precedent in the history of this country. And the severity of the blow is greatly aggravated in moral effect by the fact that it is dealt only to a handful of individuals.” So said William Gladstone, four-time Prime Minister & Chancellor.
George Goschen (Chancellor of the Exchequer 1887-92) stated; "When you embark on this system of graduation there are no stages, no landmarks, nothing whatever to guide you. There is no principle of justice – no principle, where you can say you ought to stop…’
Over the next 50 years this ‘graduation’ increased rapidly as the tax morphed into a tool of wealth distribution, with landmark events such as the People’s Budget of 1909 paving the way. By 1949, estates over £1,000,000 had gone from being taxed at 8% to 80%.
If you have ever visited a country estate and wonder why the history of the property may end abruptly with a gift to the National Trust in the mid-20th century you may wish to consider Inheritance tax and s31 of the Finance Act 1949 (as originally drafted).
But how does this apparently radical tax compare with today? Using the ONS’s house price data* as an appropriate measure of inflation for Inheritance tax (as property is often the main asset of an estate) an abbreviated version of the tax in 1949 would look like this today:
Estate does not exceed £263,353: 0% Rate of Tax;
Estate of £395,030 to £658,383: 2% Rate of Tax;
Estate of £1,316,766 to £1,645,958: 6% Rate of Tax;
Estate of £2,633,532 to £3,291,915: 15% Rate of Tax;
Estate of £5,267,064 to £5,925,447: 28% Rate of Tax;
Estate of £7,900,596 to £9,875,745: 40% Rate of Tax;
Estate exceeds £131,676,600: 80% Rate of Tax.
(*ONS house price figures state house prices were £1,911 in 1949 and £251,634 in 2010. This data series goes no further, so £251,634 has been used for 2016. It should be higher)
Even though one imagines the 1949 rates would have seemed controversial at the time, they are strikingly more favourable than the rates in force today for nearly all but the most wealthy. Furthermore, they had a clear, unmistakable philosophy whose merits could be readily debated: a direct and progressive tax on wealth.
That philosophy was more liberally applied in 1975 when, in the midst of economic crisis and high inflation, the government widened the tax; most strikingly, including a separate levy for large lifetime gifts from cradle to grave.
Once again using ONS’s house price data*, an abbreviated version of these crisis rates would look like this today:
Estate does not exceed £320,226: 0% Rate of Tax;
Estate of £320,226 to £426,968: 10% Rate of Tax (on that slice);
Estate of £426,969 to £533,710 15% Rate of Tax (as above);
Estate of £640,452 to £853,936 25% Rate of Tax (as above);
Estate of £1,067,420 to £1,280,904 35% Rate of Tax (as above);
Estate of £1,280,904 to £1,707,872: 40% Rate of Tax (as above);
Estates exceeding £42,269,800: 75% Rate of Tax (as above).
Despite the tax inexorably creeping down the wealth chain, these crisis rates are still more favourable than those in force today for the vast majority of people. What is more the lifetime gifting tax, which generally had much lower rates, was only relevant if one made substantial annual gifts, as the annual gifting allowance (adjusted for inflation) was far higher than the 35 year-old £3,000 allowance in force today.
Yes, the net was spread far wider than in 1949, but the purpose of the tax was still the same: a direct and progressive tax on wealth.
Today its purpose is less clear.
Inheritance tax has found its way into more and more homes and arguably represents nothing more than a tax on paying off your mortgage and prudent
saving.
If 30 years ago, someone had bought a 3-4 bed house in many parts of the UK with the aid of a mortgage, they might celebrate their freedom from debt with an Inheritance tax problem; especially if they had squirrelled away some money into savings and investments as their professional skills developed and income increased.
Unlike many with substantial wealth, they may not have planned for Inheritance tax, thinking perhaps it would not apply to them; meaning that someone who never considers themselves as particularly wealthy can end up paying more tax than someone who unmistakably is.
There needs to be a debate about Inheritance Tax; and whether to return it to its roots or abandon it entirely. However that debate cannot be truly productive unless the root cause of the huge inflation contributing to its growing reach is first debated: the credit-based monetary system.
Unfortunately, the latter involves the analysis of a system that is incredibly complex and fragile; an overhaul of which may take some time and no little skill.
In the meantime you are well advised to plan.
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