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The terrible argument that won’t die: “inheritance tax is double taxation”

IHT
June 3, 2023

33 Comments

Here’s Jacob Rees-Mogg in Wednesday‘s Telegraph:

Former business secretary Jacob Rees Mogg said inheritance tax raised only a “modest amount” for the Treasury and should be scrapped. The taxman collected £7.1bn in inheritance tax last year. He said: “Death duties are an inefficient form of taxation that is unfair and economically damaging. Unfair because it is a double tax on already taxed assets.

We hear this a lot. But it’s a terrible argument:

We pay tax on already-taxed assets all the time

Literally every day:

  • I just bought a kebab. 20% VAT. I paid for it out of taxed income. Double tax. And this applies to almost everything I spend money on.
  • I bought petrol yesterday out of taxed income. I paid fuel duty, and VAT on the fuel duty. Triple tax.
  • Same with alcohol – VAT is paid on top of the alcohol duty. Triple tax again.
  • I pay the salary for my assistant out of my own taxed income. He buys petrol for his car. My income tax, his income tax, his fuel duty, VAT. Quadruple tax.

And so on and so on.

The point is: there is no principle that we don’t pay tax on already-taxed assets. There never could be such a principle.

In practice, most of the time, the main inherited asset hasn’t been taxed at all

House price growth over the last 40 years means that most of the wealth of the “boomer” generation is in inflated house prices – and that rise in house prices was mostly untaxed.

That’s the same generation whose estates (if over £1m) are going to be paying most of the inheritance tax for the next 20 years.

So likely a majority of the estate value subject to inheritance tax will never have been taxed before. No double tax.

Dead people don’t pay tax

Let’s accept two unlikely premises for the moment. It’s unfair to pay tax twice, and the assets subject to inheritance tax were already taxed.

But the critical point: they were taxed in the hands of someone who just died. The burden of inheritance tax isn’t paid by a dead person – how could it be? – but by whoever is inheriting. They get the asset for free, and most certainly didn’t pay tax on the asset before.

So there is no double tax at all, even conceptually.

Tentative conclusion

We double and triple tax all the time. This isn’t an example of double taxation. This is a terrible argument. Please stop making it.

Footnotes

  1. Who does not exist ↩︎

  2. I’d be grateful to anyone who can find an example of quadruple tax involving only one person ↩︎

  3. The estate legally pays, but who legally pays is economically almost irrelevant. The question is: who economically carries the cost of the tax? It can’t be the dead person, because they are dead. The tax reduces the inheritance for the beneficiaries. So obviously it is the beneficiaries, the inheritors of the estate, who bear the economic cost of the tax ↩︎

33 responses to “The terrible argument that won’t die: “inheritance tax is double taxation””

  1. Edward Pingu hyde avatar
    Edward Pingu hyde

    You cannot have anything “for free”, English grammar does not permit this to happen

    Reply
  2. James Cloud avatar
    James Cloud

    You say only 4 percent of estates pay, then go on to explain how the dead don’t pay it is the beneficiaries who pay. Unless each dead person only left their estate to one beneficiary, then clearly more than 4% of beneficiaries pay.

    Reply
  3. david avatar
    david

    Double taxation on assets is wrong? But on other stuff is okay? Why?

    youre comparing SPENDING ON GOODS with GIFTING WEALTH

    The people who are gifting wealth are also paying “tax” on their spending.

    What an embarassing article . Clueless

    Reply
    1. Dan avatar
      Dan

      I’ve heard this before: “it’s not that double taxation is a problem; double taxation on assets is a problem”. Why? How come it’s okay for me to be taxed twice, three, four times on goods/services but not on assets? What is the principle? Where does it come from?

      Reply
  4. RJS avatar
    RJS

    The main iniquity is that IHT hammers a fairly small demographic. Those who can afford to pay for advice from an excessively paid tax lawyer are unlikely to pay much IHT (nor is said tax lawyer), while those who piss their wages up against a wall are unlikely to pay much IHT, either. That leaves just the squeezed middle classes …

    Reply
  5. Evan Price avatar
    Evan Price

    We inherit many things from our parents – and some are great and some not so great – and assets of any kind, like any of the great things we inherit from our parents (abilities, skills etc), are a windfall and not a right.

    Reply
  6. Malcolm Wallace avatar
    Malcolm Wallace

    A high earner will lose the tax exemption for pension contributions, so they pay income tax on earnings, put what is left into a pension, pay income tax again when they draw their pension, spend it on petrol, paying fuel duty, and then VAT on the duty. Quadruple taxation.

    Reply
  7. Tom avatar
    Tom

    I agree with all this, but the other critique I wish was put to people who moan about IHT is this. People can acquire wealth through hard work, through successful investment or through being in the good graces of another person who dies while possessing wealth themselves. We have to levy at least some tax. Which of these three do we least object to penalising through the tax system?

    Reply
  8. John Dunsmore avatar
    John Dunsmore

    I like your article. Spot on. It is also quite invigorating to consider the idea of a 100% Inheritance Tax rate. Apart from the inter-generational fairness of it, the behavioural consequence would likely lead to people passing on their wealth before they die. There might well be negative consequences too and you need some sort of safety net for unplanned issues. But it is worth thinking through. Not sure we will ever meet a politician who would consider it! John

    Reply
    1. Dan avatar
      Dan

      Sorry, but I think that’s nuts. No country’s ever done such a thing. There would be industrial scale avoidance, evasion and migration. But politically such a non-starter that we’ll never find out!

      Reply
      1. Karl F avatar
        Karl F

        The exemptions to IHT make it seem quite leaky already while the 40% rate seems steep. How about simplification and a lower rate – at the extreme (say 10% – as per your paper on the effective rate for large estates in July 22) ) surely some of the arguments around exemptions for agriculture, business and certain trusts start to fall away, while it would barely be worth the planning hassle and loss of control issues that take up so much time and cost for more modest inheritances. Perhaps this is an instance where a lower rate, accompanied by sensible reform, could both increase revenue and reduce complexity?

        Reply
  9. UK tax émigré avatar
    UK tax émigré

    Hi Dan, thanks for the interesting article. I have been a fan ever since your work on Nadhim Zahawi. If people choose to live in the UK, they must pay whatever taxes are due.

    I think that the main criticisms of IHT are more profound than any single point. Ultimately, however, if the sort of people in scope for IHT want to live in the UK, they must accept that it is a high-tax society and getting higher.

    I and many colleagues from London law firms have moved overseas. I am surprised that far more people have not done likewise yet. The increasing opportunities for, e.g. corporate and arbitration lawyers in Dubai make it extremely attractive.

    Here’s my rather pessimistic prognosis for the UK, in terms of ever higher taxes,: https://bit.ly/UKprognosis2. Perhaps I am wrong, in which case, I may consider a return to a more prosperous and less predatory UK tax regime in a decade or so. Can you really see UK taxes going down significantly – ever – though?

    Reply
    1. Dan avatar
      Dan

      I can’t, because there is currently really nobody in politics seriously arguing for lower taxes, and a smaller State. I think that’s a shame.

      Reply
      1. Joe Coghlan avatar
        Joe Coghlan

        Is a meaningfully smaller state possible? Is there any large advanced economy that has achieved it without huge inequality and social and political instability? I can’t think of a ‘small state’ country I’d want to live in unless I was very wealthy.

        Reply
        1. Dan avatar
          Dan

          Happy to leave political points like that to other people…

          Reply
    2. Mark Smith avatar
      Mark Smith

      If people choose to live in the UK!? I’m English, I was born there, served in the Armed Forces and all my family live in England. It is not a choice, it is our home…
      Why should my children not inherit our business and family home we have owned since the 50s?

      Reply
  10. Jilly avatar
    Jilly

    Not what you asked, but an important point, is that capital gains are washed out on death, so if you leave assets to your spouse, they acquire at market value, though no IHT, so negative tax if you look at it one way. If your assets qualify for 100% APR or BPR, you get CGT uplift *and* no IHT.

    These advantages only benefit the quite wealthy upwards, as most people’s main asset isn’t subject to CGT, being their house, which is already exempt from CGT.

    Reply
  11. PRF avatar
    PRF

    The problem with the argument in the article is that kebabs, petrol, alcohol and salaries are not “assets” and not remotely comparable with money that has been legally earned, already been taxed and has been saved.

    Inheritance tax is fundamentally different in that it is not taxing a ‘transaction’ where the purchaser receives a benefit. For me, the terrible argument is the one put forward that does not seem to understand the difference…

    Reply
    1. Dan avatar
      Dan

      So what’s the principle, then? Double taxation on assets is wrong? But on other stuff is okay? Why?

      Reply
      1. Richard avatar
        Richard

        Not sure I can leave a Kebab to my daughters in my final will and testament but I would love to be able to leave them a good sum of money on a house I will hopefully pay off, with income / money which was taxed at a higher rate over 20+ years… it’s my asset.

        The rules on IHT baffle me. Why can’t they just lower it and say you are only taxed on the first £200k and then increase that threshold when you’re getting into estates worth more then £500k, £750k, £1M etc

        Seems incredibly confusing as it stands today.

        Reply
  12. Jason Rideon avatar
    Jason Rideon

    “I pay the salary for my assistant out of my own taxed income…”
    But your assistant would be a deductible expense from your gross pre tax income (assuming it was a work assistant)? Not sure how many people in the real world that you are referring to have assistants that are nothing to do with their job which is the scenario you are hypothesising about?

    Reply
    1. Dan avatar
      Dan

      Then I guess you can substitute “babysitter”, “nanny”, “cleaner”, “plumber”, etc. Most people hire service workers whose cost is not tax-deductible.

      Reply
      1. Jason Rideon avatar
        Jason Rideon

        I’m not sure that’s really the best argument then. Basically any service (& actually goods) that you buy for a personal basis is what you are claiming is subject to ‘double taxation’ (or triple etc). I’m not agreeing with Mogg’s argument at all, but you are doing a disservice by attacking his self serving argument in this rather illogical manner in my opinion. Your previous posts about the probability of raising greater tax revenue by lowering the rate and exemptions / thresholds is far more persuasive an argument.

        Reply
  13. Paul Parkinson avatar
    Paul Parkinson

    You make a valid point re the same money being taxed multiple times.

    Could an example of 2 be I inherit a property & under the terms of the will I as the legatee (as opposed to the residuary estate) am responsible for paying the IHT on the value of the bequest.

    I pay that tax bill out of either my disposable income or cash savings both of which have previously been taxed.

    I keep the property and decide to let it out to recoup the money I have laid out to pay the IHT. I pay tax on the rental income after deducting allowable expenses and I incur VAT on certain maintenance & improvement expenditure.

    After I have recouped my money the property has increased in value so I decide to sell it but not invest the money (thus no rollover relief) so I may be liable to CGT on any net profit on the gain.

    Reply
    1. Jane Cummins avatar
      Jane Cummins

      Not sure about this example. It wonky works because other assets/income are used to pay the IHT. The property could be sold and a lower value property bought to rent out. And CGT is only on the uplift in value from date of death, so not a double tax.

      Reply
  14. James Craig avatar
    James Craig

    Do you not pay both income tax and National Insurance on some slices of your income? If so, you could upgrade Dan’s triple tax examples to quadruple.

    Reply
    1. Dan avatar
      Dan

      Great point. And employers’ NI

      Reply
  15. Richard avatar
    Richard

    I think you can get to quadrupling tax by:
    1 Buying case of fine wine from France with my taxed salary
    2 paying import duties
    3 paying VAT on wine and duties
    4 selling the wine the next day and incurring CGT

    Reply
    1. Nicholas A avatar
      Nicholas A

      I buy Chilean wine out of dividend income from my company (paid out of post – CT profits) on which I have suffer IT – and suffering customs duties, excise duties and VAT on the wine (quintuple taxes), which I store in my cellar on which I pay council tax – and on – and on – and on …

      Reply
    2. Jane Cummins avatar
      Jane Cummins

      There is an argument for adding in Student Loan repayment as well.

      Reply
  16. AMINOOR RASHID avatar
    AMINOOR RASHID

    In response to your request number 2.

    I own shares in a multinational group that pays dividend. The profits are generated overseas and subject to local corporate income tax (tax point 1). Those same profits (although calculation starting point may different) are subject to Pillar 2 Income Inclusion Rule assuming effective tax rate is below 15% in the UK (tax point 2). The main profit making enterprises are the US subsidiary of the UK group and is subject to 5% withholding tax based on the treaty (tax point 3). The final dividend received in my hand as UK tax resident person is subject to UK income tax (tax point 4).

    Reply
    1. Dan avatar
      Dan

      Nice! Can we add in GILTI and get five? DST and get six?

      Reply
  17. Stephen Hardwick avatar
    Stephen Hardwick

    Don’t forget that National Insurance is also a tax, so most PAYE income is already double taxed to start with.

    Reply

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