I'll pay when I'm dead

I almost feel sorry for John Redwood. His much-touted report on improving Britain's competitiveness runs well over 200 pages, but the only headline in the papers, all across the spectrum of opinion, concerns his proposal to abolish inheritance tax. This actually merits one six line paragraph in the report, around 180 pages in! How did this get to be so important? Only 6% of estates currently pay inheritance tax, and I surely can't be the only person who'd rather pay taxes after I'm gone than pay them now.

In any case, people hoping to get their hands on their parents' dough completely tax-free are likely to be disappointed. What Redwood and his colleagues are suggesting is that capital gains tax should be reformed and then applied to inheritances. This is exactly the system that operates in Canada: death triggers a "deemed disposition" of assets, resulting in the calculation of capital gains which are then subject to tax at the regular rate. Having gone through the execution of the wills of both of my wife's parents, I can attest that this emphatically does not mean that the estate is passed on tax-free.

Redwood's idea makes sense (I can't believe I just wrote that!) to the extent that it represents a more efficient way of dealing with the taxation of estates. Why have a separate and unpopular inheritance tax when you can get the same results through capital gains tax? However, this positive aspect is offset, or maybe even completely outweighed, by his proposal that the value of principal residences should be exempt from all taxation upon death.

This exemption (which also exists in Canada) changes Redwood's proposal from a sensible piece of tax simplification into a blatant sop to the property-obsessed middle classes. It could well have an undesirable effect on the property market: if I can pass on my home without tax, I'm all the more likely to remain overhoused in an unnecessarily large house until I croak, rather than downscaling in my dotage as people always used to do. This can only worsen the existing shortage of larger family homes, and help to push up their prices further.

There's a lot to think about in the Redwood report. Abolishing inheritance tax is neither the best nor the worst idea in it -- and it's certainly not the most important.