Quote of the day

“I find economics increasingly satisfactory, and I think I am rather good at it.”– John Maynard Keynes

Monday 28 October 2024

Sweden shows us what abolishing IHT might look like:

 

Sweden got rid of inheritance tax — why can’t we?

IHT can be devastating for families and it could soon become a lot more complicated

Johanna Noble
The Sunday Times

Inheritance tax: no other tax is more divisive. Those on one side say it is only fair to tax the rich, while others argue it’s a double taxation that harms hard-working families.

But what would it be like if we scrapped it?

Let’s turn our attention to Sweden, where I grew up, which 20 years ago waved goodbye to inheritance tax.

Before then there was a lot of debate around the subject, much like in the UK now, but to understand it you need to take a closer look at Swedish life.

By landmass it is the fifth largest country in Europe, but it has a population of only 10.6 million people, with 1.7 million residing in Stockholm, the capital.

There is plenty of countryside here, and this, combined with the Swedes’ love of nature, means many families have a house — known as a stuga — in the country or on one of the 30,000 islands that make up the archipelago. This is where people come together to celebrate Christmas, Easter and Midsummer. Grandparents, uncles, aunts and cousins gather with herring, snaps and green princess cake. And typically these houses were passed down from generation to generation.

But while many Swedes had property wealth, they did not have savings in the traditional sense. This meant inheritance tax could have a devastating impact. There were cases where a surviving spouse had to sell the family home or the stuga to afford a tax bill. This was especially true in coastal areas and other parts of the country where property values had soared.

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A report by Svenskt Naringsliv (Swedish Enterprise) said: “The burden was distributed unfairly, since the wealthiest taxpayers were often able to legally avoid it through tax planning, while low and middle-income taxpayers had no choice but to pay.”

It caused a lot of pain for not much money; by the time it was scrapped inheritance tax only generated about 0.15 per cent of the country’s GDP.

It also had dire consequences for the Swedish economy, sparking an exodus of wealthy entrepreneurs, such as the Ikea founder, Ingvar Kamprad, as there was no relief for family-run businesses, unlike in the UK.

Since abolishing inheritance tax, many business owners have returned to Sweden, which in turn has increased tax revenues (the wealth tax was also abolished in 2007).

One of the arguments for keeping inheritance tax in the UK is that it helps redistribute income fairly between generations — essentially freeing up housing.

However, it doesn’t really achieve this goal because the families most affected often find ways to circumvent it. The worst hit are often those who have suffered a tragedy — the untimely death of both parents, perhaps — and that seems a particularly cruel way to operate a tax system.

Before Sweden repealed inheritance tax, various exemptions and reliefs were experimented with, creating instead layers of complexity. It just didn’t work. Is Britain making the same mistakes?

On the eve of Labour’s first budget since 2010, it looks like the chancellor could fiddle with some of the allowances that save families billions of pounds a year — adding further complexity to complexity.
Inheritance tax cannot be viewed in isolation — it needs to be part of a much broader conversation about wealth and equality. In Sweden this debate is now in full swing.

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Despite the tax being scrapped, owning a stuga has actually got harder because property prices have kept on rising and wealth disparity has increased. If you’re not already wealthy, it has become near impossible to catch up.

The number of Swedes worth more than $1 million is on the rise, up from 467,000 in 2022 to 575,000 in 2023, according to the UBS Global Wealth report. For a land that prides itself on its equality, there are now growing disparities between rich and poor.

Here, the conversation around IHT continues and on Wednesday we’re likely to see more layers of rules added to the existing system. This will make it harder again for the average person to navigate, potentially catching families out. Meanwhile, the bigger questions around wealth and taxation remain unsolved.

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