More tax lunacy from Occupy London
Posted by Christie Malry on October 27, 2011 at 12:02 am
I really must stop reading the Occupy London Direct Democracy website. It's truly bad for my blood pressure. Today's vignette:
Oh Sandy. The '7 year rule' for gifts relates to inheritance tax. The idea is that a dying man shouldn't be able to artificially reduce the value of his estate by giving away vast gobs of cash on his deathbed. So gifts within the last 7 years of someone's life are scooped back into his estate for calculating his Inheritance Tax bill. There are some complicated rules about exactly how this calculation is done in practice.
It's insane to describe this regime as a 'tax avoidance loophole'. However, if you insist on doing so, there are two possible alternatives:
- You tax all gifts as part of the deceased's estate. This would mean trawling back through decades of records to trace every single gift and seeking tax payments from possibly dozens of people. The administration would be incredible.
- You tax all gifts at the time of receipt. This would mean the taxman turning up on Christmas Day to demand tax be paid on little Johnny's gift from his aunt. It's totally illiberal and unworkable.
At the time of writing, Sandy's proposal enjoyed a 5-2 majority. I weep for the complete lack of common sense among these idiotic kids who propose their way as a viable alternative to our - admittedly flawed - Parliamentary system.
Until a few weeks ago New Zealand went for a variant of option 2 (whilst having no inheritance tax). But Gift Duty has now been scrapped due to being unworkable and not raising any money.
Still have no inheritance tax as well!
I agree that it's not a loophole because it is clearly provided in statute that gifts more than 7 years before death are exempt.
I don't know much about NZ taxation but I suspect the reason it raised so little was that testators knew they could just wait until they die, whereupon the gift would be tax-free free.
There is no prima facie reason why receipts someone obtains by way of gift should not be taxed in the same was as employment income. In fact, it is absurd that someone is taxed on the fruits of the labour when another person who does nothing to earn it receives a large sum.
Surely the person giving the gift has paid appropriate tax on their earnings? If I give my lad his pocket money, I can't do that out of untaxed income. Therefore there is no "prima facie reason" why gifts from a person should be subject to double taxation.
Although I seem to recall that the US has a large gifts tax (over $10,000?).
I've never understood this argument about "double taxation" in the context of gift, estate or inheritance tax. If I pay my window cleaner out of my taxed income should the cleaner be exempt from income tax on his receipts from his trade? If my employer pays me out of his taxed profits should I be exempt from income tax on my employment income? The fact is there is "double taxation" like this throughout the tax system, broadly when someone makes a profit that they didn't have before. So I see no reason why a gift tax inter vivos and on death couldn't or shouldn't work. That would also help us get away from the idea that IHT is a tax on the dead (strictly IHT on death is charged on the estate, in effect of course it is borne by the donees) and towards a more open, fair system which recognises that gifts received are essentially just another inflow of money like income or gain.
cont'd...
So let's scrap IHT (effectively estate tax) and replace it with a gifts tax both during life and on death.
Of course there would have to be some kind of annual exemption to avoid reporting of trivial amounts such as pocket money, in the same way as there is a personal allowance for income tax and annual exempt amount for CGT. It might even be the same as the current annual exemption of £3,000 for IHT.
The gift is only taxed once, and is taxed on the recipient. That the giftor paid tax on something else beforehand is irrelevant. 'Things' are generally taxed dozens of times as they pass through the system. That's the way it goes (and I offer no comment on whether it's fair or not).
I'm with Alex - I'd much rather tax the unearned income of the recipient than the earned income of the giftor. I don't see any way of making that workable, but the principle is sound.
If your employer is paying you out of his taxed profits, he needs to report his accountant for professional negligence. Salaries are a simple deductible business expense.
You are still (deliberately, I suspect) missing the point on "double taxation". You receive your salary but you have paid tax on it under PAYE. You give some of that net salary to your son. Your son has an untaxed receipt. Under a gifts tax he would then pay tax on it (just like you paid tax on your salary). Your salary has been taxed once, the gift to your son will then be taxed once. There is no double taxation of the same receipt.