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

, Money Editor, The Times and Sunday Times

Sunday October 27 2024, 12.01am, 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.

A quick look at inheritance tax (before the Autumn Statement)

 

It’s a Leftist myth that abolishing death taxes only helps the rich

Our tax rulebook is so complicated that multi-millionaires can easily find ways to avoid IHT

MARK LITTLEWOOD21 November 2023 • 6:00am

What a difference a couple of months make. In September, Jeremy Hunt said that reducing the tax burden was virtually impossible. Yesterday, Rishi Sunak announced that the time for tax cuts had finally arrived. If he were so minded, the Chancellor should now have the “fiscal headroom” to abolish inheritance tax (IHT) and still have a good number of billions to play with. 

IHT bears many of the features of a bad tax: it’s relatively easy to avoid with adequate planning, raises little revenue and also has the uncomfortable feature of hitting the bereaved when they are likely already to be at a very low ebb. The popular myth around IHT is that it simply penalises the unworthy children of the super-rich. In this caricature of events, we’re merely ensuring that those blessed with highly successful, affluent parents are unable to choose a life of indulgent, unmerited leisure upon their parents’ passing. 

The truth is rather different. Our tax rulebook is so complicated that multi-millionaires can easily find ways to avoid IHT. They may not be able to cheat death, but they can use trust funds and other contrivances to swerve tax liabilities. Those who have done reasonably, but not enormously, well for themselves – perhaps owning a decent but not extravagant house, and having a reasonable but not absurd savings portfolio – find it harder to avoid. They don’t have the resources to employ clever accountants and financial advisers.

When the grim reaper comes, the taxman will be following in his wake. And the children – who tend to have less, often much less money than their parents – are made to suffer regardless of their circumstances. No surprise, then, that IHT is unpopular. On a very basic level, many people seem to feel that accruing money to pass onto one’s children is a noble pursuit. Yet the “optics” still point our policymakers towards keeping the tax, for it is deemed unacceptable to be “helping the rich”. 

Sadly, this attitude now afflicts our entire tax system. A chancellor cannot put together any sort of tax change without the distributional effect being considered the primary basis by which it should be judged. A tax change that benefits the moderately affluent – or even the wealthy – is feared to be unconscionable unless there are equivalent or greater gains to the poorer parts of society. A package of measures that might assist households in the top third of earnings by, say, £1,000 per annum, but only aids the bottom decile by £100 a year, will be derided as a “giveaway” for the rich. 

It sometimes feels as if the main purpose of the tax system is not to raise resources efficiently and fairly for public services while maintaining vital incentives, but rather to move us inch by inch to some fantasy nirvana in which wealth and income gaps have been abolished altogether. Even if a swathe of carve-outs and loopholes allow the wily to dodge the headline rates of tax, the impression must be given that those towards the high end of the salary scale are being asked to do ever more. 

Abolishing or lowering IHT won’t supercharge the economy overnight. But it would be a step towards making the tax system simpler and more straightforward. That should be enough of a reason to embrace such a change. But if no such move is forthcoming, it will reinforce the idea that the main preoccupation of politicians is what taxes look like, not what they actually do.