What is the primary purpose of a tax: to raise revenue to fund public services or as a tool to help engineer society in a way which the government favours? It should disturb us that Darren Jones, the shadow chief secretary to the Treasury who is likely to be holding the real job by Friday, seems to believe the latter.
Addressing a public meeting in Bristol in March he hinted that Labour will seek to increase inheritance tax, telling his audience ‘you need to think of the inheritance tax as a way to redistribute money’. He added that a Starmer government will seek to use the tax to tackle ‘inter-generational unfairness’.
We will start to see punitive taxation
This is not to say that inheritance tax is an unfair tax. As I have written here before, I favour treating inherited money in exactly the same way as money which has been earned in wages, or gained through investments. I would like to see an entirely neutral tax system which does not penalise any particular group, or reward people with clever accountants but which is focused entirely on one objective: to raise revenue in the fairest way possible.
This would be best achieved through a two-rate flat tax which treats all income and capital gains equally. I don’t care much for the argument frequently made by opponents of inheritance tax that it amounts to ‘double taxation’. All money is taxed multiple times as it passes through the economy – I pay income tax, as does the plumber I hire to fix my sink, as does the café where he goes and buys his breakfast. In any case, a vast amount of the money being inherited at the moment is in the form of untaxed capital gains on family homes which were bought back in the days when homebuyers qualified for mortgage interest tax relief. So, no, a lot of money being inherited has never been taxed once, let alone twice.
But where I am going to depart company with Darren Jones is on the principle of using the tax system for ulterior political objectives – even where those objectives might seem to be attractive, such as mitigating the wealth gap between generations. If you are concerned that middle-aged people are monopolising wealth, IHT is a very blunt instrument for dealing with that. Not all inheritance goes to the middle-aged children of the recently-deceased: many families are choosing to skip a generation and leave a significant slice of their estates to the young, in order to help them on the property ladder. Moreover, not everyone who dies is elderly: in some cases IHT will be paid on the estates of parents with dependent children. If you want to address the unaffordability of housing, a far better approach would be to designate much new housing such that it can only be bought by owner-occupiers – and not by investors or speculators.
But there is a wider issue here. If an incoming Labour government is minded to see IHT as an instrument of social engineering, it will surely be likely to see other taxes in the same light. We will start to see punitive taxation – where taxes are imposed not to raise revenue but to discourage something or other.
Arguably, VAT on school fees is already in the category – if large numbers of parents are inclined to withdraw their students and put them through the state system instead, it could end up costing the government money. It is the same with Labour’s windfall taxes on oil and gas companies, which seem to have sprung from its net zero policies rather than a desire to earn useful extra revenue, and which are already leading to the withdrawal of investment from the North Sea.
That is no way to run a tax system. Any tax designed to dissuade people from doing something is likely ultimately to be self-defeating because it will attack the very source of revenue. True, we can’t choose not to die, but there is an awful lot of other things which punitive taxes will stop us doing.
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