Reeves's inheritance tax plans are performative nonsense

Telegraph

21 hours ago

It's hard not to feel some pity for Rachel Reeves. Her party and her own promises have boxed her into an impossible position.
The idea was that the mere presence of a calm – and broadly sane — Labour Party would mean that 'stability' would return automatically.
It turns out that maths and economics don't quite work this way, and she has found herself with a three-pronged conundrum.
First, she cannot cut government expenditure at all. Even attempting to marginally trim the rise of our unaffordable welfare state will prove to be unpalatable to her party's backbenchers.
Labour's client base of voters tend to hover around the public sector or rely on handouts so, politically, spending will have to go up.
Second, the party only got into power because you exuded some vague commitment to economic prudence. It promised to get borrowing down. Break this pledge and the markets will kill them.
Third, in the heat of battle Labour conjured up a barely comprehensible piece of campaigning verbiage that it would not raise tax on 'working people'.
This proved to be just about adequate to get most of its spokespeople through a three or four minute interview on television or radio during the election campaign, but the Government must not be seen to break this pledge.
Given this trifecta of economic nonsense, Ms Reeves faces a serious day-to-day problem.
How can she raise some more revenue to make it look that you are even half-serious about balancing the books?
The latest wheeze seems to be to tighten up inheritance tax rules. This, we are told, will only affect the rich, will mean that those with the broadest shoulders bear even more of the increasing state expenditure burden and could help to generate a smidge of 'fiscal headroom'.
Such a move would be a nightmare on almost every level. Death duties are just about the worst sort of tax you can levy because they have virtually none of the features that a sensible tax should exhibit.
They are complex, they are avoidable, and they are difficult to collect. The inescapable truth is that if you are to levy a tax on someone's estate at the moment of their passing, you need to monitor how they dispose of their assets in the time leading up to it.
If you can give away your assets on your deathbed just before you take your last breath, the scheme won't work.
This is why we have the seven-year rule. Anything you transfer in these seven years before death is considered – at some level – to be part of your estate.
Although few of us know the exact time we will meet the Grim Reaper, many can take a guess. As you hit your seventies or eighties, it might be a good time to start divesting your assets to those you wish to receive them.
You might not get your timings bang on the money, but you can take a fair guess. You can give away £3,000 a year to any individual without incurring IHT, so start doing so.
You can probably shuffle other things in the direction of your descendants too. If you have a box of fancy jewellery that has been handed down over a generation or more, make sure this box finds its way to your children before you die. There's probably no paperwork, so no easy recourse for the HMRC.
Finally, if you're super-rich – worth, say, ten million or more – set up a range of elaborate trusts and companies that are intended to financially assist your beneficiaries, but don't advertise this as the obvious motive.
Attempting to tighten any of these rules may be politically performative but it won't raise many beans. Currently, IHT accounts for less than 1 per cent of government income.
Even if you could get this to 1.1 per cent or 1.2 per cent, which is unlikely, you have not seriously moved the fiscal dial.
The idea of the tax authorities attempting to monitor Christmas gifts given by a parent to their child years before the former's death is as unpleasant as it is unrealistic. HMRC can't even operate a functional telephone enquiries system at present.
Benjamin Franklin was right when he said the only two certainties in life are death and taxes. But a civilised and sane society should try to keep the two entirely separate.