Mary Dejevsky: The real iniquity of inheritance tax

My theme for the eve of Gordon Brown's Budget is the iniquity of inheritance tax. Aha, you will think: here comes another comfortable member of the middle-classes bleating about the imperative of abolishing the so-called death tax so that she can inherit - or bequeath - a fat chunk of property in the Home Counties. If so, I am sorry to disappoint you. This is actually not the iniquity I have in mind.

The one I am thinking of is the way a Labour - all right, New Labour - Chancellor last year threw a pre-election sop to the middle classes, substantially raising the threshold at which inheritance tax is payable. Like all good concessions, it was planned to come into effect in stages, allowing the Government to claim credit three years running.

This was an iniquity in every possible way. It was an election bribe. It gave more money to people who self-evidently did not need it - the deceased on the one hand, and beneficiaries of estates worth at least £275,000 on the other. And it betrayed everything that a Labour government professes to stand for as regards social justice. If soaring house prices in the South-east and desirable areas elsewhere is the chief reason why the gap between the haves and have-nots has been widening, the bequest of this largely unearned wealth will only widen the divisions into the second and third generations.

Not, of course, that the Chancellor was thanked for his largesse. The potential beneficiaries scented weakness and agitated for more. As soon as this year's Budget loomed, they rejoined their campaign and they will not be happy until the tax is abolished - as George Bush is trying to do in the US. Mr Bush, though, it might seem superfluous to point out, happens to be on the political right.

The arguments against inheritance tax boil down to three. The first is that the estate on which tax is being levied was built up from income legitimately earned and taxed during the deceased's lifetime. The second is that it is tantamount to a human right to be able to bequeath your estate to whomsoever (or whatsoever cause) you like.

The third is that inheritance tax, as originally conceived, was designed to affect only the very rich. House price inflation, however, has brought more and more estates into the inheritance tax bracket. And the proportion will rise exponentially as the generation that most benefited from the housing market departs this life. This argument blames successive governments for not raising tax thresholds in line with inflation. The result is a de facto tax rise on ordinary householders trying to do the best for themselves and their families.

And it has to be said that none of these arguments is untrue. The middle classes are second to none when it comes to making their case. But note the figures. We are dealing with estates worth more than £275,000 currently. To most people this is not small change. It is 50 per cent more than the price of the average house across the country - London and the South-east included.

There is another perspective on all this, however, which would class the house price rise as a windfall - no more nor less - that has benefited those currently in early middle age to retirement. Why should the next generation of the middle class be given such a disproportionate leg-up from a family bequest without also contributing - via the Exchequer - a small proportion to those not so fortunate? It is hypocritical to talk about "fairness" when the lottery of house prices has been anything but.

One way to diminish the distorting effect of bequests would be to tax the beneficiary rather than the estate. The most egalitarian solution would be to reduce or abolish the tax breaks on estates and brave the fury of the better-off. A report out last week called the bluff of one particular group of special pleaders, concluding that the best way to harm a family business was to hand it on to the eldest son. It argued for the standard threshold to apply to family businesses in place of the present zero rate.*

Having messed up the pensions system, extended means-testing to "social care" and kept inheritance tax thresholds constant, this Government seemed to be edging towards a more egalitarian treatment of dying, only to flinch in election year.

Even now, though, there is a socially responsible solution for those rich enough to be concerned about inheritance tax, but too selfish to want to pay it. They should do their utmost to bring their estates below the tax threshold by lavishing gifts and generally having a splendid time. Goodness knows, the Chancellor will appreciate someone keeping spending going when the rest of the economy starts to flag.

*Inherited family firms and management practices, Centre for Economic Performance, LSE