Time for campaigners to drop the death tax, think-tank says

Campaigners for universal free personal care should drop the death tax idea, says a new think-tank report.

Although recognising that any kind of compulsory levy on estates to fund care is unlikely given changes in government, a new report from the Strategic Society Centre is advising campaigners that a new tax on estates would not be up to the job of funding universal free personal care in England and Wales.

In Charges, Taxes, Estates and Care: A comparative analysis, the Strategic Society Centre says that a 5% inheritance tax would be insufficient to fund universal free care, and an inheritance tax rate of at least 13% would be required.

But, as the report points out, such a tax-rate would likely result in many families moving wealth around in order to lower the tax bill for their estate, meaning the whole death tax policy may be unworkable.

The Strategic Society Centre has been crunching data from HM Revenue and Customs on the value of estates in 2007-8.

The new report argues that campaigners for universal free personal care funded through inheritance tax should instead adopt a lump-sum charge + cap model, in which a flat-rate charge is applied to the value of estates, but a cap is imposed on the percentage value of estates that would have to be paid. This cap would avoid poorer households being forced to hand over too large a proportion of their estate as a charge, and would address concerns that a estate-charge model is insufficiently progressive.

Although not calling for it as the basis of reform  the Centre will be making recommendations on how to fund care in the autumn – Charges, Taxes, Estates and Care: A comparative analysis points out that a charge + cap model would also side-step many other problems with implementing an inheritance tax to fund care and support. These problems were identified in an earlier report from the Centre, entitled Inheritance Tax: Could it be used to fund long-term care?. Issues include linking social care revenue streams to fluctuations in house prices, as well as requiring wealthier households to pay higher bills toward an IHT for care and support than they would have for the same entitlement from a private insurance product; an outcome that would be unlikely to be politically tenable.

James Lloyd, Director of the Strategic Society Centre, said:  “A 5% tax on estates to fund universal free care wouldn’t yield nearly enough – only around 3 billion. Our calculations show a tax-rate in excess of 13% would be required, but at those sorts of levels, so many families would respond by transferring wealth around that it would be impossible to know what new revenue would be brought in.”

“Imagine you had 1000 sitting in a bank account, but were told that if you left it there, the taxman would come and take 130. Of course you would move it, and so would most families if faced with a potential tax-rate of 13% or more on the value of their inheritance over 25,000. The estate tax idea doesnt seem to be workable as a policy to fund universal free long-term care and campaigners needs to rethink it.

Instead, campaigners for universal free care would be well-advised to adopt a charge + cap model. It is marginally less progressive, but would be much more workable as a policy solution.

In the context of the Dilnot Commission on Funding Care and Support, the government has made it clear that the death tax is off the table. However, most commentators believe that a properly funded system will only come about when the property wealth of the older cohort is brought into play, and the point when this wealth becomes available is on death.