Inheritance tax was not designed for the super-rich – that’s a Tory myth

http://www.theguardian.com/money/blog/2015/apr/25/inheritance-tax-super-rich-tory-myth

Version 0 of 1.

One of the enduring myths around inheritance tax is that it was designed for the super-rich, but now “normal” people will find themselves caught in the net as a result of house price rises. George Osborne used almost precisely those words when speaking to a Tory party conference.

Yet the truth is that inheritance tax was never designed for the super-rich only. In the 1930s as many as 30% of deaths resulted in death duties, compared with just 3% today. Since then, rather than increasingly clobbering the middle classes, inheritance tax has been dramatically reduced. But the tiny number of wealthy people left paying it shout very loudly indeed.

Today’s IHT is directly descended from the Estate Duty of 1894. By 1925 it was levied on every estate worth more than £100, or around £6,000 in today’s terms, although on a sliding scale so that small estates paid little, rising to 40% on the very wealthiest.

I’m indebted to Harvey Cole, an economic and development consultant and former leader of Hampshire County Council, for some extraordinary figures. In 1938-39 there were 153,000 estates liable to estate duty, which was almost 30% of the number of deaths, compared to just 16,000 in 2011-12. Just before the second world war, with rearmament consuming vast government expenditures, estate duty contributed almost 15% of total tax raised, compared with less than 2% today. The other myth, as Cole highlights, is the belief that the government grabs 40% of everything left over £325,000. He says that in 2011-12, 34,000 people left over £325,000, worth a total of £60bn. Yet just £3bn was paid in IHT, as the rich used the vast panoply of reliefs to dodge paying.

The idea peddled by the Conservatives that people on middle incomes are being caught in IHT is pure bunk. Ukip goes a step further and wants to scrap it entirely. So does the Green party – although it has a rather different take. It proposes that inheritance tax be turned into an “accessions” tax. It would depend on the wealth of the recipient, not the donor. If you have assets of less than £200,000, you should pay no tax on an inheritance. But if you are wealthy, you would pay a lot more.

Like so many radical Green policies (I love its commitment to capping the pay of the highest earner in a company at 10 times the salary of the lowest earner), it hasn’t a hope of ever reaching the statute book. Instead, we will continue down the path of the last few decades, with IHT withering away and wealth in the hands of ever fewer people.

• Last month I arranged car hire for a holiday in France. Nowhere was I warned that I may need a special code (lasting just 72 hours) from the DVLA. Indeed, the car hire website states that I need to bring the paper counterpart of my driving licence with me to the hire desk – even though from 8 June it will no longer be a legally valid document.

The DVLA insists that everyone knows about this change, when in reality almost no one does. The car hire companies I spoke to this week seemed rather bewildered. Are holidaymakers (especially the elderly) really going to remember to obtain an online code from the DVLA before heading off to the sun?

Not content with a clamping spree after the tax disc changes, the DVLA might be about to ruin the first few days of your holiday, too.

p.collinson@theguardian.com