So, the Conservatives have capitulated. After days of facing negative headlines about the ‘dementia tax’ Theresa May has given in and announced that there will, after all, be a cap on care costs faced by an individual. No wonder modern governments find it so hard to eliminate their structural deficits. So loud are the protests when they propose any tax increase or cut in spending that they are doomed to limp along with an ever-greater gap between what they feel compelled to spend and what they are politically able to raise in revenue. Public opinion may be king, but it doesn’t add up to a balanced budget.
We’ve heard endlessly over the past few days of how ‘unfair’ it is that one’s inheritance is dependent on the luck of whether your parents develop a medical condition requiring long-term care. Rather less has been made of the fact that inheritance is by its very nature dependent on luck. Some of us, of course, are unlucky enough not to have wealthy parents in the first place. Does that mean the taxpayer should step in and correct that terrible personal misfortune?
Fraser Nelson, Will Heaven and Lara Prendergast discuss the ‘dementia tax’
We are now faced with an ever-increasing bill for long-term care and with no party brave enough to make a manifesto commitment to propose a sensible way of paying it. But I have a suggestion which would allow the Tories to sail through this election campaign – and yet to deal with the problem in the aftermath. They should announce tomorrow that, as well as putting a cap on care home costs, they will abolish inheritance tax. That will have voters flocking to the polling stations. Then, come the first budget after the election the Chancellor should announce that he is, in accordance with the manifesto promise, to abolish inheritance tax. He should then announce what is to replace it. Instead of tax estates, as the government does now, it will tax legacies. But it won’t do this punitively: it will simply treat inherited income in exactly the same way as it any other form of income. In other words, if you inherit £1000 you should be subject to income tax just as if you had earned the money. That would be perfectly fair, but would also be a huge revenue-raiser. At the moment you can inherit up to £650,000 from your parents tax-free – soon to be raised to £1million under George Osborne’s extra allowance for the family home. Under my proposal, an individual would be able to inherit only £11,500 – the Personal Allowance – without paying tax, and even then they would only receive their inheritance tax-free if they had no other income.
I would love to hear any arguments – and real arguments, not merely bluster from people who have wealthy parents and are waiting to inherit a large sum — as to why the above is unfair and should not be enacted. And no, don’t bother using the ‘double taxation’ argument. All money is taxed twice, three times, multiple times as it passes to one person after another. My plumber doesn’t call it ‘double taxation’ when he has to pay income tax on what I pay him to do a job – paid out of income on which I have already paid tax.
The old age care bill is rising, and it will have to be paid for somehow. Treating inherited income the same way as any other income is by far the fairest way of doing it.