Why does everyone hate inheritance tax? | Dan Neidle

0:00This podcast is sponsored by Raymond James. In an increasingly standardised wealth management industry, Raymond James' high-touch, service-first way of working sets it apart. It puts people at the heart of everything it does. Advice that's as unique as you, that's the power of personal. Please remember, investing involves risk and you may get back less than you invested. Hi folks, it's Farnoosh Charabi from the So Money podcast, here to talk about NerdWallet Wealth Partners. They offer free tools for high earners who'd actually like an answer, like their calculator that estimates if you're on track for financial independence.

0:34Plug in a few numbers to see how your savings path may support your goals, or their wealth building checklist for high earners. It's a step-by-step guide for prioritizing your dollars once you're making six figures. And if you still have questions, you can connect with one of their financial advisors who specializes in working with high earners in their 30s and 40s. Learn more at nerdwalletwealthpartners.com slash so money. NerdWallet Wealth Partners LLC is an SEC registered investment advisor. Registration as an investment advisor does not imply a certain level of skill or training, nor does it constitute an endorsement by any securities regulator.

1:07Please see nerdwalletwealthpartners.com for disclosures and important information.

1:19Hello and welcome to Coffeehouse Shots. I'm Michael Simmons, The Spectator's economics editor and earlier this week I spoke to the tax expert Dan Needle about inheritance tax, why everyone hates inheritance tax and whether there's anything that can be done to fix inheritance tax. Dan, thanks very much for joining. Now, we're going to be talking about inheritance tax today, but since we've got you on and we had the budget last week, I wanted to just get your reaction to that. Were you as bored by it as everyone else seems to have been? Oh, no, I was much more bored. Yeah. In a sense, it's deluded of me, but I'm always hoping for tax reform.

2:00I'm like a priest expecting that a sinner is going to come back to God, and they never do, and we know they won't. And if you don't get big tax reform at the start of a parliament with a government that says it's all out for growth and a government that has a massive majority, if you don't get tax reform then, you're certainly not going to get it in the current circumstances. But I hoped against hope we would, and of course we didn't. Why do you think we never get tax reform? Why does tax reform not seem to excite politicians? I think it's always good to go back and look at Nigel Lawson's 1988 budget speech.

2:37Now, it is very much a creature of its time. Lots of people are going to disagree. People across the spectrum will disagree with positions that he took. But he had a vision of what he wanted to achieve. He delivered the vision in a very single-minded way, and he persuaded people of it as he did it. So that needs a couple of things. It needs a politician who has a vision, a politician who's willing to go with that vision, even though aspects of it won't hold very well. Maybe voters will have no interest at all. And a politician who's willing to sell it to people. And those are characteristics which you don't see much of in politics today.

3:13Yeah. So one tax that may get reformed potentially is inheritance tax. And the Conservatives are talking about abolishing it on family homes. There are even some on the Labour side who would like to see changes to inheritance tax. But why do people hate it so much? Nobody pays it. There are a bunch of different answers to this. And I think with most questions like that, which one is true partly depends on your politics, but also they're all true to a degree. So one answer is classic Marxist false consciousness. People have been lured into hating inheritance tax because of the evil Tory press. And actually most people aren't affected by it.

3:53But we tested that. We ran a poll a couple of years ago against the generosity of a polling company. And we saw that if you explain to people the levels at which inheritance tax apply, yeah, opposition drops a bit, but not that much. That's not what's going on, or at least not much. Another element is that more people are exposed to inheritance tax than maybe you think. Yeah, only 5 % of estates pay it, but a much higher percentage of pensioner households can rationally expect to pay it if they fell under a bus tomorrow. And we've had some ass and that's just about 20%. Then, of course, you've got their children, their grandchildren.

4:31So maybe more people are affected. And then you've got an ideological position, which is maybe there is just an instinctive dislike of inheritance tax. People think they should be able to leave stuff to their kids as a matter of principle. So it's probably a mixture of those. And what about this argument that you often hear that this is double taxation? You know, this is people earned income throughout their lives. They already paid tax on it once. Why should they be taxing it again? It's a really poor bollocks argument to me. I bought a chocolate bar this morning. I bought that out of taxed income.

5:08Oh, my God, double taxation. Hang on. Hang on a second. My accountant probably bought a chocolate bar as well. So I paid him out of my taxed income. He had taxed income. Then he bought the chocolate bar. oh my god triple taxation there's no principle against double taxation never has been never will be it's a terrible argument i wish people wouldn't make it and what about the positive cases for um inheritance tax because um you know you've you've set out in your first answer how more and more people um are going to be paying it it strikes me that one of the problems we have in inequality in britain is not sort of between the super wealthy and the not wealthy it's it's the homeowner homeowning boomers and the young.

5:50This seems like maybe a good way to rebalance some of that if more and more people are going to sort of fall foul of paying it. It's a very, very sad world where a principled left-wing argument is almost never made by anyone on the left, but is made by the spectators. I don't quite know what's going on there. But absolutely, you're right. Every time people talk about inequality in popular discourse, I'm thinking of Mr Polanski and many others, they talk about the super wealthy, the people who often have a tenuous connection to the UK, come to the UK for a few years, leave after a few years. Whatever you think about that, that is not affecting people's lives day to day in a way that house prices and rental prices are.

6:32For me, I wouldn't say housing is at the root of all of our problems, but it's a huge problem of day-to-day inequality affecting people, particularly young people across the country, particularly in London. A lot of that is generational inequality. And there was a report recently from the Resolution Foundation looking in detail at that. And yes, if you care about housing inequality, then inheritance tax does have a role in doing something about it, which isn't why inheritance tax was created. Inheritance tax wasn't really created for that. It wasn't created to raise money. It never raised very much money.

7:10It was more creative because of the huge amounts of land that were locked up in the big landed estates. And it was thought that those needed to be over time broken up rather than locking up lots of land under one ownership for generations and generations. And that was the purpose of the original estate tax. And it failed. Obviously, those estates still exist. They've always benefited from lots of exemptions. So inheritance tax ended up not really touching the big landed estates and instead affecting the upper middle class. And that's one of the reasons why it's so unpopular, because it's seen correctly as not applying to the very rich, but applying to people who are merely successful.

7:51Yeah. And going back again to your modelling on this, which I think suggests that one in five pensioner households could soon find themselves in the net of inheritance tax. Does that mean it's becoming a more sort of targeted middle class tax? I mean, that is a bit kind because that implies this has happened deliberately. In fact, it's happened purely because the zero rate band hasn't changed for years. And at the same time, the house prices, of course, massively swelled during the 90s, during the 2000s. And that means that you have a generation with more wealth than any previous generation. And share prices swelled as well.

8:37So yes, you've got much more money than before, potentially being subject to inheritance tax. It strikes me that inheritance tax should, in principle, be quite easy to avoid or minimise. You can give away a lot of your wealth as gifts while you're still alive. I appreciate we've tightened up inheritance tax trusts, but there are still possibilities there. Are there people that end up getting stung by inheritance tax? Have they just not arranged their tax affairs properly? I should probably start with a party political broadcast on behalf of the Tax Advisor Party. Trusts do not avoid inheritance tax.

9:15If I right now put my house in trust, there'll be an upfront 20 % inheritance tax charge. Not when I die, but right now, and then 6 % every 10 years. So trusts for most people, most very wealthy people, as well as most normal people, are not a good inheritance tax planning solution. And all the newspaper headlines saying so-and-so avoided tax using a trust are almost always wrong. So it's not trust, but as you say, you don't need anything so complicated to trust, just give your stuff away. And if I had, I don't know,£100 million, and I am in my 70s, then I should absolutely give 90 million pounds to my children.

9:54And as long as I survive seven years, no inheritance tax. As far as the very wealthy is concerned, it's a tax on people who don't trust their children. It always has been. Problem is, say I don't have 100 million pounds, say I only have 5 million pounds and half of that's my house. So we're now in, do we call them the upper middle class? Don't know what you call them, but someone in that position. they can't give the house to their kids because they live in it and the rest of their assets are presumably living off most of them so they can give a bit to their kids much they can't and so that kind of level of wealth so three million maybe up to seven million eight million that's peak inheritance tax because you have enough in terms of assets to have a pretty large inheritance tax bill but you don't have enough that you can give lots to your kids so moving on to how this tax might be reformed.

10:49The Conservatives at their party conference announced that they were going to abolish it on the family home. So you can pass down the family home tax-free. Do you think these are sensible reforms? So I think there is an economic problem with abolishing inheritance tax, which is that you then give people a big incentive to hold on to assets. Imagine I am a successful business owner. Right now, I have an incentive, as discussed, to give away some of my business to my children when in advance of the fact I die. That's a good thing because it means that the asset is not just being locked up unnecessarily.

11:27But abolish inheritance tax. Dying becomes amazing tax planning because it wipes out the capital gain. My children would inherit the business and have no tax of any kind. And if they sold it the day after they get it, that have no capital gains tax either. So abolishing inheritance tax is going to ossify assets to a significant extent. That's the first effect. The second effect it will have is that you'll have people, my lucky heirs, receive a bunch of money and now have less incentive to work. And there is some fairly compelling economic evidence that abolishing inheritance tax can have a negative economic impact for this reason.

12:10It's often said there's a pro-growth benefit to abolishing inheritance tax. It's never been shown. There's no evidence of that, but there is evidence of the opposite. So abolishing inheritance tax, not a massive fan of it, but you know, it's a rational, you can believe that inheritance tax is a bad thing and you could want to abolish it and then fine, that is a thing you can do. But the tool is, it's not the abolishing that bothers me so much. It's the intermediate step, which is whacking up the zero rate band. fine, and then completely exempting the family house, which makes me sad, and I think makes most economists and tax wonks across the political spectrum rather sad, because it forgets that incentive effect.

12:52If you have an inheritance tax exemption without limit on a particular asset, then people are going to hold onto and expand that asset. Why would you downsize? If you downsize, then you're suddenly moving your stuff from a completely inheritance tax exempt asset to something taxed at 40%. It's a 40 % tax on downsizing. Mad. At worse, people have an incentive to upsize. Of course, most people wouldn't want to move to a bigger home, but lots of elderly people want to move to be near their kids. And now they've an incentive to move to somewhere more expensive. And that is not great for the housing market.

13:29So if the conservatives were to win the next election and implement this interim policy, you think we would see that? We would see older couples literally moving to bigger, more expensive houses. People respond to incentives. That's the thing. The left always forget. It's almost always a bit harsh. Yeah, almost always. The tax policy proposals you see from the left ignore incentive events. They sing a thing, think you can stick a tax in it, and think the thing will continue as it was. It doesn't work that way. People will respond to the incentives you create because that's what humans do and whether you like it or not is irrelevant.

14:09And this unfortunately was a proposal that didn't take into account incentive effects. It wasn't really the Tories fault. They relied upon a proposal put together by, gosh, who was it? Was it Oxford Economics or am I being rude? You're right, it was Oxford Economics, yeah. It was Oxford Economics for the think tank onward. And somehow these economic consultants forgot That's about incentive effects. Amazing. But if you take them into account, we reckon it would almost double the cost of the merger from 6 billion to about 11 billion. So it was a really poor show by the economic consultants. And I hope in due course, the Taurus just bury this.

14:50Just bury it, yeah. So what about the idea that you hear from some people on the other side of the argument? I think the most notable example I can think of is Lewis Goodall argues for this. that actually inheritance tax should just be set at 100%. The idea being that everyone should be born basically equal and then we'd have this wonderful meritocracy and you could earn as much as your talents allowed you to earn, but the state takes it all back at the end. That is perhaps the best example of someone on the left just refusing to think about incentive effects. Hello, Lewis, what's going to happen if you have an inheritance tax of 100 %?

15:30what do you think people will do? Well, they're just going to give it away, aren't they? They're going to give it away. They're going to leave the UK. I mean, people, I have no evidence for this, but my experience is that people's willingness to avoid taxes or even evade taxes goes up if they regard the tax as illegitimate. Right. And I think that people would, quite rightly, regard a 100 % inheritance tax as illegitimate. Okay. And then you get onto the practical things. If my wife and I are hit by a bus crossing the road, my kids have nothing. Really, Lewis? Really? What happens? My kids go out on the street.

16:14They go straight to an orphanage. It's so unserious a proposal that it just amazes me. If I'm disappointed and surprised at Oxford Economics, I think I run out of superlatives when I come to this idea. Yeah, fair enough. Have you ever met a human being before? Have you ever thought about something before you propose it? Yeah. I think the answer is on no and no. Yeah, yeah. I think I agree. Most of our viewers and listeners would agree with you on that as well. Thinking about you personally, you know, as the tax expert and journalist then, does inheritance tax need reform at all? And if it does, how would you reform it?

17:01So I think it needs reform because it's just really weird to have a tax which is at so high a rate, it's higher than most countries in the world, which doesn't apply significantly to the very wealthy, does apply to the moderately wealthy, upper middle class, whatever you call them. That seems to be a bad, a bad tax. one answer you could take is you is you could make it apply at 40 to everybody hit them really hard so for example you could tax gifts you wouldn't want to do it on normal gifts you'd want to make i don't know a million pound million pounds and higher gifts you taxed but i think if you make the inheritance tax leak privs that the very wealthy really are paying 40 then you'll find And the very mobile ones will simply leave the UK.

17:52And yeah, there's a lot of bollocks spoken about. Oh, if you do this, they'll leave. And when you talk about small changes in tax, that is almost always bollocks. But when you talk about 40%, that's a large number. And no, so I would hesitate before doing that. What else could you do? I mean, if I ruled the world and I didn't have to worry about minor things like elections, I would make it apply to almost everything. I would have a very small tax-free amount, and then I would reduce the rate enormously, take the rate down to, I don't know, 8%, 10%. Almost scrap the zero rate band. Make it so it's a nuisance for people who pay it rather than something that changes behavior.

18:37Now, of course, this means that 95 % of people who don't currently pay inheritance tax, many of them would now pay inheritance tax, so I would be thrown out of office and probably held on a pitchfork. So it's something like that that purist in me rather likes. If we're not going to do that, then I would probably find a way to tax very large gifts, but reduce the rate. I don't think it's sustainable to tax very large gifts and keep the current rate. And also, I feel that the unpopularity of inheritance tax is kind of an unstable position to be in. That sooner or later, it is going to be abolished because it's so unpopular.

19:11and anyone who believes in the household tax, and I believe in the household tax, I think needs to buy its existence by reducing the rate. Sure. And finally, before we let you go, Dan, we started talking about how you were wishing that this would be the budget where we finally got major tax reform. Obviously, we didn't get that. Are you optimistic that one day someone will come in and we'll have a chancellor who's just singularly obsessed with cutting the tax code, reforming tax? Are you optimistic that that day may one day come? One day, my friends will come. I'd love to think that. I'd love to think that there's a political party which is developing some serious tax plans based from a clear view of what will drive growth.

19:56Unfortunately, I don't see it. The Tories are handing out these kind of freebies, which no doubt poll well, but it's not tax reform. The Lib Dems seem on a one-party competition to come up with as many silly tax promises as they can. Reform is chucking bizarre tax cuts at their favourite demographics. So for example, we have their tax cut on overtime, which again ignores the obvious incentive that will create to turn everything into overtimes. And the Green Party, I'm going to be too polite to talk about. So no, sadly right now, I see no sign of anyone really caring about tax reform. Everyone says they care about growth.

20:35Well, almost everyone says they care about growth and that they'll do anything for growth They won't actually do the things that you really could do to boost growth, to radically reform land taxation, abolish stamp duty, abolish stamp duty on shares, reform corporation tax, eliminate the kinks in income tax. All of these would be pro-growth. None of them would be hugely expensive. Why not? Thank you, Dan Needle, for joining me there. And thank you for listening to Coffee Our Shots.

21:27Hi, folks. It's Farnoosh Tarabi from the So Money podcast here to talk about NerdWallet Wealth Partners. Making more money doesn't come with instructions, but that's where NerdWallet Wealth Partners comes in. They're a financial advisory firm built for high earners in their 30s and 40s. They create a financial plan with every client. It's basically a roadmap from where you are today to where you want to be. When you decide you want to retire five years earlier or spring for the bigger house, they'll run the numbers on what's possible and meet with you regularly. Think of NerdWallet Wealth Partners as the manual for high earners that you never got, plus someone who's actually read it.

22:04Learn more at nerdwalletwealthpartners.com slash so money. NerdWallet Wealth Partners LLC is an SEC registered investment advisor. Registration as an investment advisor does not imply a certain level of skill or training, nor does it constitute an endorsement by any securities regulator. Please see nerdwalletwealthpartners.com for disclosures and important information.

22:32Thank you.