The case for and against inheritance tax

Jean-Baptiste Colbert, France’s celebrated 17th century finance minister under King Louis XIV, famously said the following: “The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing.” Or, to put it more bluntly, a successful tax should earn the government plenty of money whilst causing as little aggravation as possible to the people paying it.

Those who argue against the levying of inheritance tax (IHT) may or may not be aware of Colbert’s quote, but it’s very likely that they’ll agree with it. Opponents of IHT often say that it actually brings in a very small amount of money, an argument the statistics appear to back up: whilst annual receipts exceeded £5 billion for the first time earlier this year thanks to the boom in house prices, this only amounted to 0.25% of GDP. For the amount of ‘hissing’ the tax causes, is it really worth it for such a small percentage of the government’s revenue? Those against IHT would say not.

In contrast, those who support IHT come at the issue from a different angle. Whilst the revenue percentage may be small, IHT still earns the government a sizeable amount of money which would need to come from elsewhere if it were abolished. Getting rid of IHT could therefore lead to greater taxation elsewhere, preventing people from being able to enjoy their hard-earned money during their lifetime. The existence of IHT can also be seen as a potential stimulant for the economy: if people know that tax will be paid at 40% on any money they leave behind, they’ll be more likely to spend it whilst they’re still alive.

Looking at IHT’s impact on business, again there are those who argue for the tax as both a positive and a negative. Those against IHT say that it takes money away from beneficiaries who may well have used it to set up a business, removing potential investable capital from the economy. Supporters of the tax counter this argument by suggesting that those looking to protect their money from IHT may well be encouraged to invest it before they die in small businesses owned by their children or other family members.

So, what’s the answer? Whether you’re a supporter of Inheritance Tax or you think it should be scrapped, it’s unlikely that such a contentious tax is going to become less of an economic hot potato any time soon, leading to plenty more hissing as the IHT feathers continue to be plucked.

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