Jeremy Hunt’s plan to cut inheritance tax is a disaster

In my BBC days, I once did a counter-intuitive story about why so many apparently right-of-centre economists and business leaders are in favour of inheritance tax (IHT). Which they are.

I approached the Adam Smith Institute, which describes itself as a “free market think tank”, for their comments and was rather surprised by their wholehearted attack on inheritance tax. I had to point out to them that the actual economist Adam Smith had been all in favour of taxing inherited tax, which my interviewee hotly denied.

I haven’t bothered speaking to them since.

But Smith was most certainly in favour of taxing the wealth of the rich when they die.

The father of free market economics was not alone in this apparently strange belief, because he and others could see what happens if you don’t tax inherited wealth.

You end up very quickly with an economy where a small proportion of very wealthy people own most of the country’s assets. Sound familiar? They then have no incentive whatsoever to try to start up businesses, develop new markets or seek to improve themselves or their prospects and by so doing boost the country’s economy.

In fact, they have interests which are the very opposite. What they want to do is sit on safe, reliable, well-paying assets – i.e. renting out property and land – that will make their life comfortable, their children’s lives too.

And so you become a rentier economy, where owning land and property is all you have to do to be prosperous, where enterprise and development are stifled and where the poor have less and less chance of ever becoming wealthy because they start out with bigger and bigger disadvantages.

Which brings us to the present day and the fact that the chancellor is, in the middle of a cost-of-living crisis, falling real wages and a collapsing state sector, storing up money for a tax cut ahead of the general election. His favourite option seems to be to slash inheritance tax yet again.

This is popular with some people, especially homeowners who want to leave their children enough to get on the property ladder themselves. But the tax-free element of IHT is already far higher than average house prices, the opt-outs and holes in the system allow anyone with any common sense to avoid most of the tax and the vast majority of people don’t pay it at all – they just aren’t rich enough.

But as I say, a cut in inheritance tax is popular with some. People can be easily whipped up into thinking the tax man wants to impoverish their children and that IHT is double taxation, when the vast majority of people’s assets are their home, which will have risen in value massively, with that increased value completely untaxed.

Of course, the far better solution would be to suppress house price inflation by building enough homes, meaning people don’t have huge amounts of money to leave to their children which they have done nothing to earn. While the children can afford a home without resorting to the bank of mum and dad.

But this government is not interested in doing that either.

So, we are left with an IHT system you can drive a bus through, and which most people never pay.

Oh, and which means the UK’s economy becomes less dynamic, less prosperous and has fewer opportunities for the brilliant and ambitious to succeed. While the chancellor loses vast amounts of tax revenue from the wealthy which he could use to help the poor.

But, what the hell, it’s a vote winner.