What’s the point of inheritance tax?

The trouble with defending inheritance tax is that it’s impossible to do so without sounding like a miserable, money-grubbing pensioner-basher (although I suppose you’re actually bashing the kids). The best its defenders can manage is the obviously contradictory: “It’s worth £3Billion per year and hardly anyone pays it anyway.” The tax systems of the world are cluttered with these slightly embarrassing throwbacks to times when monarchs were always looking for ways to fund the latest acquisitive war or lavish palace building programme.

Tax collectors of old had to be opportunistic: taxation was arbitrary and sometimes punitive because the assets of the taxable masses were – most of the time, anyway – invisible, out of reach. Death was a convenient moment for the taxman to intervene and grab some cash because, at death, those assets had to surface, at least for long enough to sort out probate (quiz: which is fairer, inheritance tax or window tax?). These days, of course, especially if you’ve got a proper job, your earned income is on show at all times and the taxman can take what he wants before you even get your share. In this context, taking a share of what you leave to your kids is harder to justify.

Of course it’s politically impossible to use the only real justification for taxing inheritance which is the perfectly sound but paternalistic economic argument that you should leave your money to someone who knows how to invest it and probably not to your idiot offspring. The theory is that the investment return on money given to Government will be better than that on money given to your spendthrift kids – who will probably blow it on Cider and trampoline lessons anyway. Leaving a proportion of your money to the Government will boost the economy and produce social goods. Leaving it to your kids might boost the economy but is more likely to provide a one-time boost to the profitability of a local off license or pie shop.

What I find myself wondering is: is there a ‘third way’? Could the dieing be obliged to leave chunks of their estates not to Government but to an approved investment vehicle, one which would yield a profit for the dead person’s intended beneficiaries but, in the meantime, also benefit, say, the hospital building programme or early years education. If I were obliged to leave 40% of my assets on my death to a fund that would produce visible benefits to the economy while still benefiting my kids in the end I think I might be happier to pay up, especially if I could actually choose the destination for my legacy: if I could pick a fund from a list, for instance.