Inheritance tax

Where did the idea for inheritance tax come from? Why do we still have it, and what was the first inheritance tax?

From this website,

Franklin Roosevelt said:

The OP is British, so he’s probably not interested in Franklin Roosevelt.

As for Britain, I can’t say. Presumably there has been something like inheritance tax since time immemorial.

The idea for inheritance came from the need to raise revenue, and the fact that transmission of property on death provided a convenient occasion on which to do so.

When somebody dies, there can be disputes over who should get his property. His sword, helmet and other portable property may well go to whoever can first get their hands on it, but houses, lands, etc are not easily taken by the first comer.

It’s in society’s interests to have some kind of rules about the transmission of property on death, partly to avoid constant warfare between family members and others who feel they have a claim, and partly to protect widows and orphans.

It doesn’t take long before you have some kind of court or office where the transmission of property on death gets registered, where disputes get sorted out, etc. And, since everybody dies, sooner or later pretty well all land and buildings in the kingdom are going to need to be dealt with in this office. So it’s a pretty useful opportunity for collecting a bit of revenue.

If you take the view that one of the important functions of the state is to protect the interests of the property-owning classes, then a tax levied on property is justifiable, and indeed is in the interests of property-owners. So, while they may grumble about it, they’ll put up with it.

Finally, if you take the view that rights of property are the natural rights of those who create property or wealth, an income tax or annual property levy may seem objectionable. This is my property; I created the value in it. Why should I give any of it to the king? But this argument falls down when we are looking at the transmission of property on death. The creator of the value is dead, and dead people have no rights. The heirs didn’t create the property or the value in it, so they don’t enjoy the same “natural right” to the property in priority to others. They only get the property because society has created rules which say, e.g., that the land of a dead man passes to his eldest son. If society can create that rule, it can equally create a rule which says that 80% of the land of dead man passes to his son, and 20% to the king (or any variation on that).

So I would guess that inheritance taxes are very ancient.

My apologies for my geocentrism.

However, I think FDR’s viewpoint is pertinent for both the US and the UK.

It would be interesting to hear about the differences between the U.S. and Britain inheritance tax laws and rates, if those differences can be stated relatively simply. It was always my guess that the U.S. had higher inheritance taxes to help avoid the buildup of “old money” or the vestment of too much financial interest and power in a permanent aristocratic class. But maybe this isn’t really the case?

I had a financial advisor friend (in the U.S.) who used to love to say that inheritance tax was really a stupid tax, because any knowledgeable person would know about the loopholes, shelters, etc. This was his argument for not repealing said tax, which seemed like a pretty dumb way of looking at it to me.

I suspect you’ll find that (in both countries) the impact of inheritance taxes will have varied over time, because governments of different political complexions will have differing attitudes to the accumulation and transmission of wealth, and also because tax rates are at least partly driven by unconnected factors, such as the amount the government wishes to spend, the size of the budget deficit and the strength of other elements of the tax base.

No figures or statistics, but it’s my impression that from the 1950s to the 1970s (at least) the UK had heavy inheritance tax rates, because (in part) social and political support for the notion of an aristocracy was not strong (to put it mildly), and taxes on inherited wealth were heavy. Certainly if you had an asset with a large capital value but relatively modest capacity to generate income (e.g. a big 18th-century country home) you were in trouble when it came to paying death duties. A very large number of country houses of architectural or historical importance came into the hands of the National Trust during this time because of death duties, and a much larger number were demolished because the National Trust refused to take them on, and the families who owned them anticipated bankruptcy due to death duties.

… inheritance tax was really a stupid tax, because any knowledgeable person would know about the loopholes …

[cynic on] Civic duties entail a portion of altruism. Since humans aren’t normally altruistic, and since dodging counter-productive activities is considered clever, all civic duties entail a degree of stupidity. Many people consider daxes, jury duty, military service, even being polite, as something little/stupid people do. [cynic off]

[cynic off]
[cynic off]
hmmmm. it won’t turn off.

As UDS has pointed out, there were practical reasons why taxes were imposed on new heirs. There was however a further reason, which was specifically (although not uniquely) true for England. All land in England ultimately belonged to the king, so everyone else only held land as a tenant. Any heir therefore needed to get his right to possess that particular bit of land recognised by the landlord. In those cases where the land was held directly from the king, the king would only grant that recognition in return for a payment, usually called ‘relief’ and usually related to the rental value of the land. Similar payments could be demanded for similar reasons by other landlords from their lesser tenants, although this would depend on the particular tenure under which the land had been leased. This could be considered a crude form of inheritance tax and, in the circumstances, was probably as sophisticated as would have been practical.

However, the first recognisably modern inheritance tax levied by a British government was not introduced until 1796. That was not related in any way to the earlier feudal duties, not least because all the remaining duties relating to feudal tenure had been abolished in the middle of the seventeenth century. Like income tax, it was introduced to pay for the war with France. Crucially, it was a tax on inherited wealth, not just inherited land. Its great advantage was that wills had already to be publically registered, so, in most cases, it was relatively easy to establish who was inheriting what.

Other countries, most notably the Netherlands in the seventeenth century, had introduced similar taxes even earlier.