The scrutiny of David Cameron's tax affairs following the release of the "Panama Papers" has given rise to a debate about inheritance tax. It should be remembered that this is a tax that does not raise significant revenue and hits middle-class savers hardest. If someone has been prudent and saved over their lifetime and paid their taxes in full, why should a big chunk of their capital go to the Exchequer when they die?
Gifts or legacies - how else can our children own their homes?
Much has been written over the last couple of years about the fact that the younger generation is facing a bleak financial future. Our children will not have generous defined-benefit pension schemes; they are unlikely to see the sort of windfall gains that my generation got on their homes and, indeed, they aren't going to be able to afford to buy a home until they are in their mid-30s at the earliest. Given the environment that they find themselves in, inheriting money or receiving lifetime gifts from their parents has become the only means by which many can even contemplate become homeowners.
The Panama Papers tax debate has infuriated me
In this context, there seems to be a strong argument for putting the threshold at which inheritance tax is paid up to an even higher level. In addition, relaxing the rules around gifts seems like a good idea too. At the moment, if you give money to your children, no inheritance tax is paid if you live for more than seven years and reduced amounts are paid if you die earlier than that. In order to help younger people to purchase their own properties, there seems a good argument for making gifts to immediate relatives free of tax after a period of say three years. In many European countries, the norm is to rent rather than buy, but Britain is a nation of homeowners - an Englishman's home is his castle and all that. The only way that many younger people will be able to buy a home before they start a family will be with help from their parents.
One other aspect of the tax debate sparked by the Panama papers was the use of offshore funds. Having been a fund manager for nearly 33 years, this has made me furious. Many investment funds are in locations like Dublin these days. Investment firms create umbrella structures, which allow investors to move their money between different funds without incurring capital gains tax. They only pay tax when the come out of the structure. Thus, if you like European stocks today, but in six months, you decide you prefer the US, then you can switch and, if you have made a gain on the investment in the European fund, you will not pay tax. This allows for the efficient management of capital and takes tax out of the decision-making process.
It's nonsense to suggest that investors in the offshore fund were attempting to avoid tax
There is also the issue of withholding tax, which, if applied to pooled vehicles of assets, puts investors in a worse position than if they had held the investments directly. In my view, it is desirable to encourage investors to place money in professionally managed funds as it is difficult for individuals to keep up with events in stock markets and react quickly to poor company results or big economic shocks without professional help. Unit trusts allow those who cannot afford to have a segregated portfolio managed by a professional fund manager to benefit from those skills. They should not be in a worse tax position as a result of being in a pooled vehicle. There is often a need for pooled funds and unit trusts to be domiciled offshore in order to create a neutral tax position. This was the case with the fund managed by David Cameron's father and it is absolute nonsense to suggest that there was any attempt by him or anyone investing in the fund, including his son, to avoid tax.
Tax is an emotive issue. Tinkering with the tax system by UK Chancellors over the last 30 years has created one of the most complex tax systems in the world. There is a very strong argument now for a complete overhaul of the system to ensure clarity and fairness.
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