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Britain may be further down the collectivist route than some of our Continental neighbours
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Waging war on inherited privilege has been the loadstar of the Left for over 100 years.
Progressive politicians have made a virtue of clobbering “unearned income” ever since David Lloyd-George’s 1909 People’s Budget.
Rachel Reeves’s inheritance tax raid on farms and family businesses sets squarely in this tradition.
But not to sound too radical, this ambition to push the UK in a more collectivist direction is presented as a mere tweak in focus, an attempt to make the UK just a little less American and a bit more European.
The argument goes that Britain’s capitalism has been too in hock to the red-blooded laissez-faire Wall Street variety and it needs to be given a more corporatist Rheinish flavour. Progressives say we would be a much fairer society if we were just a little bit more Continental.
But what if we are already further down the collectivist route, in terms of the taxation of inheritance, than some of our European neighbours?
Unsurprisingly, American death taxes are very much lower than those in the UK. At the federal level, only estates of more than $13.6m (£10.8m) are currently taxed.
Couples with combined assets of over £20m can live easy in the knowledge that after their passing, their children will not be troubled by the federal taxman for any of their legacy. Although 18 US states do have their own death taxes, last year kicking in at a low of $1m in Oregon and a high of nearly $13m in Connecticut.
Unsurprisingly, very few American estates pay any federal death tax. In 2021, just over 2,500 estates, in a country of over 330 million, were subject to it. In the UK in the same year, 27,800 estates paid inheritance tax, in a country of 68 million. Taking account of the different population sizes, 54 times as many estates are subject to national death taxes in the UK than in the US.
Now let’s compare Germany and its reassuring social democratic model.
Take a divorcee, whose modest house in London’s Putney bought 30 years ago is now worth £2.1m, has savings of £400,000, and leaves her estate equally between her three children.
On her death, the only part of her £2.5m estate that will be exempt from inheritance tax will be the first £325,000.
Unlike still married couples, the allowance of her ex-husband who predeceased her cannot be applied to her assets – the UK has a hefty tax on marriage breakdown.
She also misses out on the additional £175,000 exemption on her home, as for estates over £2m, this is reduced by £1 for every £2 over that threshold. It has disappeared to nothing when assets reach £2.35m.
So without fancy tax planning, the children of our imaginary middle-class Putneyite will be landed with a tax bill of £870,000 – 40pc of everything above the initial £325,000.
Now let’s look at her Munich equivalent, also with three children, and an estate of roughly equal value. The Germans, along with virtually all of Europe, don’t tax the estate but rather the individual legacy.
The first €400,000 each child inherits will be tax-free, and then they will each pay 15pc tax on the remaining €600,000. Without employing any wheezes, the combined tax on our Bavarian divorcee’s estate will be €270,000 or roughly £225,000 – not much more than a quarter of what would be due in London.
The German death tax rates on a son or daughter max out at 30pc – and this is for individual bequests of over €26m (over £21.5m). The Teutonic rates can hit 50pc, but that is if someone chooses to leave over €13m (£10.8m) to an unrelated random punter – and surely few are quite that lucky.
Perhaps it’s time for Ms Reeves to take a trip to Germany and learn something useful from a country she would like to emulate.
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