Iniquitous tax that helps the super-rich

THE QUEEN will not have to pay inheritance tax on her mother's £50m estate. This has greatly exercised my colleague Lynda Lee-Potter, and understandably so. Why should the Queen be allowed to escape a tax which everyone else, from a duke to a dustman, is obliged to pay?

Obviously she shouldn't. Even the staunchest royalist will wonder why the Royal Family should be exempted when you and I are unable to pass on our much more meagre wealth untaxed to our children. This disparity of treatment could drive a wedge between the monarch and her people.

But then you may say that, if the monarch had to pay inheritance tax like the rest of us, in a few generations her successors would be forced to depend entirely on the state in order to keep body and soul together. After all, many great aristocratic houses have been impoverished by successive doses of death duties, and the same could happen to the Royal Family.

Except, of course, it wouldn't. Or at any rate, it would not be likely to. The fact is that many dukes and rich people don't pay inheritance tax, either. For one thing, there are exemptions for valuable works of art. More important, since 1986 it has been possible to avoid inheritance tax altogether under the seven-year rule. If you transfer your wealth more than seven years before your death, it will not attract tax when you shuffle off this mortal coil.

There is, it is true, plenty of room for slip-ups. If a very rich man makes over his estate but dies within two or three years, and his legatee follows suit a couple of years later, a great fortune will have been wiped out. All the planning in the world will be of no avail if the Grim Reaper repeatedly hoves into view.

None the less, the point stands. The very rich, with their battalions of expensive lawyers and accountants, have a pretty good chance of avoiding inheritance tax. This would apply to the Queen even if she were not the beneficiary of a seemingly unfair deal struck with John Major in 1993. It is the not-so-rich, whose comparatively modest wealth is largely tied up in bricks and mortar with a few savings on the side, who really get clobbered.

Consider this fact. The average price of a house is well over £100,000. In some parts of the country such as London and the South East it is much more. Many people who have never considered themselves remotely rich now own houses worth more than £250,000. Over that figure, the tax inspector helps himself, or rather the Government, to 40% of your estate.

Hundreds of thousands of people who did not have to bother with inheritance tax a few years ago are now affected by it. When New Labour was elected in 1997, the cut- off figure was £215,000. This has risen to only £250,000 in line with general inflation as house prices have rocketed. In some places they have doubled. As a result, many more people are being drawn into the net of inheritance tax.

If he were interested in equity, Gordon Brown, the Chancellor of the Exchequer, would have raised the tax threshold far above £250,000. But, in fact, he has discovered an unexpected source of income for the Treasury. Inheritance tax in 1997 represented only 1.5% of all taxes raised, having fallen from about 20% in the early years of the century. But since 1997, inheritance tax payments have increased by more than 50% as the value of homes has soared. At the same time, the Treasury has been making a further mint out of stamp duty.

Is this not iniquitous? Inheritance tax is already a multiple tax. In other words, on death, you are penalised again on the wealth which has already been taxed via income tax and possibly capital gains tax in life. If your wealth is invested in your house, you will have also paid council tax and probably stamp duty. Money which you have managed to keep out of the maw of the Inland Revenue when you were alive is subjected to another round of taxation after your death.

One could mount a partial defence of inheritance tax for the super-rich. Huge inheritances can sap the energy and enterprise of the young. We all know stories of spoiled young people who have never lifted a finger because Daddy happened to peg it early. Then there is the question of equality. In a country without inheritance tax, the disparities of capital are bound to widen dramatically. This was certainly the belief of Sir William Harcourt, the Liberal Chancellor who introduced death duties in 1894, and a few years later famously declared that 'We are all socialists now'.

But however powerful these arguments may be when applied to the super-rich - and I must admit that I have some doubts - they make no sense in relation to people who have built up a modest nest-egg after a lifetime of hard work. The stability of the middle-classes depends in part on their ability to pass something on to their children.

As things stand, young people are having to grapple their way up the greasy pole, as their parents may have done, because those parents are unable to pass on even a small bequest to their children without the Chancellor sticking his claw in.

Tony Blair, it is often said, is in love with the very rich. There is certainly a lot of evidence that this is so. We know all about the Hindujas and Bernie Ecclestone and the rest of them. Gordon Brown, by contrast, shows few signs of being drawn to flashy gentlemen with loads of money, and is believed to value hard work and rectitude.

Why, then, is he developing inheritance tax so that it bears upon the ordinary people of Middle Britain while having little or no impact on the superrich? As I say, with a bit of luck and some expensive tax planning, the very wealthy can generally avoid inheritance tax. But this is not true of the only moderately well- off. It is not allowable, for example, to make over your house to your children under the seven-year rule so long as you live in it. The super-rich can transfer their assets and avoid inheritance tax. Not so those middle-class people whose wealth is tied up in houses from which they may not want to move.

When Old Labourites say that New Labour favours the super-rich, I usually tend to take what they say with a pinch of salt. But they are right in the case of inheritance tax. Forget about the Queen: she is only, in her different way, enjoying the privileges which other very rich people are claiming. The villain of this piece is not the Queen but the Chancellor of the Exchequer or, if you prefer, New Labour and the whole shooting match.

The most extraordinary, incredible thing is that much of Middle Britain continues to believe this Government has its best interests at heart. It doesn't.