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Inheritance Tax

Polly Toynbee

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The pips will be squeaking in the Commons today as Dawn Primarolo, the paymaster general, takes on the rich over the trusts designed to avoid inheritance tax. This is only one more tax loophole closed, as she and the chancellor stalk the avoiders, the state forever destined to plod several steps behind the sharpest tax lawyers. But from the shrieks of fury in the Mail, Telegraph and Express, you might think this was indeed revolution from Gordon Robespierre and Dawn Defarge. But it only brings in a modest £15m in year one, and £100m a year in a decade.

Before plunging into the detail, step back a moment and look at the big picture. What is happening to wealth? First the good news: nearly 70% own their own homes, able to remortgage to give their own children that vital first step up on the property ladder, and many now inherit their own parents' homes in a midlife windfall.

Yet even the average homeowner still doesn't share much of the national wealth - and certainly isn't touched by this new trust-fund tax. The median property value (where half are worth more, and half less) is £157,500. The average in the south-east is £192,000. But no one starts to pay any inheritance tax until the estate tops £285,000 - soon to be £325,000. How many people is that? Just 6% of all estates. What's more, this change to ensure that all trusts worth more than £285,000 should now pay a fairer share of tax will touch nothing like even that 6%, but the far smaller proportion of those rich enough to gift away more than £285,000 to a trust in their lifetime.

So when George Osborne astonishingly claims that this modest tax change is "a wake-up call to middle England", frankly it takes your breath away. Middle England? It shows just how wildly out of touch the Cameron set can be with what is ordinary. Notting Hill is a stratosphere away. Do they know the median (middle England) salary is just £21,000?

In personal property and liquid assets, the top 10% owns half of everything. The bottom 50% of the population owns just 6%. Count liquid assets alone, and the top 1% owns 63% while the bottom half owns just 1%. And this wealth inequality is growing fast, year on year. Money is not trickling down but gushing upwards.

Julian Le Grand, economist and recent Downing Street adviser, looking at revenue for 1999-2000 found that total marketable personal wealth (not counting pensions) stood at £2,594bn - while what he calls the "pitiful" yield from inheritance tax was just £2bn. "Wealth passes almost untaxed between generations through lifetime gifts, through exempt items such as agricultural land and forestry, and through devices such as discretionary trusts," he writes.

Since then, Gordon Brown has been tracking the cash, recouping many billions. He has obliged tax lawyers to register any clever tax-avoidance scheme being marketed so that new loopholes can be speedily closed. (A wheeze called dividend stripping was a new legal way to declare dividends as notional losses: it would have lost the treasury £1bn a year, but was quickly outlawed.) The stealth is all on their side.

But tracing money is hard. The rich can pass on a private business 100% free of tax, ditto agricultural land. Plenty of fiddling goes on with offshore funds which the Revenue has little chance of tracking, despite new powers to snoop into suspect offshore accounts.

But the main loophole is the extraordinary rule that you can give away any amount free of tax if you stay alive for seven years thereafter. It's like something out of a fairy story, that magical number seven. When will I die? Can I keep Granny's body in the airing cupboard and pretend she lasted the mystic seven years? It can intimidate the elderly into giving away their money before they want to: what if one of the children turns greedy and won't help out if I live long and need help? Gambling on how long you will live is a kind of tontine. It's time to tax all lifetime gifts, above a set allowance.

The row today is over taxing interest in possession trusts, so they end up paying the same as inheritance tax - a fair plan. (Remember we are only talking about a tiny proportion of the rich.) The only oddity is that if they tie up money until a child is grown up, they will pay the tax but if they gift it outright and survive the magic seven, then they pay nothing. But it's the seven-year rule that is out of kilter. Time to kill it off. There are scores of good ideas for fairer property and riches distribution - another subject for another day - but some could be very popular plans, if only Labour would start an open discussion about the danger of infinite inequality escalation.

Just think how rich you have to be to create a trust worth more than the tax threshold of £285,000 in your own lifetime with money you don't need. You would have to be in the top 0.5%, which Cameron and Osborne certainly are. No wonder they don't know what "middle" is when Osborne storms: "This is the single most iniquitous and damaging of all the tax measures ... This is ordinary taxpayers who have saved and built up assets and want to leave them to their children in a responsible way." He called on history: "Trusts originated at the time of the crusades when knights departing for the Holy Land wanted to ensure their families were certain of a regular income." The Telegraph wrote of "the subjugation of the family to the will of the state"; others in the same mad vein describe as "normal" those families who are abnormally rich.

When you spell out the trajectory of future wealth gushing up to the top, almost everyone is alarmed. Whatever people might set as their own idea of fairness, most think that there must be some cap on inequality. Yet you don't hear the government argue the case. Brown didn't mention the tax on trusts in his budget speech, let alone explain why it is right and fair. No wonder the right can frighten the living daylights out of middle England so easily, when the left says nothing about excess. Redistribution by stealth wins no arguments.


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