Inheritance tax, ‘care caps’ for the elderly, and devolution

Inheritance tax (IHT to its friends) is an odd tax.  It doesn’t raise a lot of money; £2.7 billion in 2010-11 according to HM Revenue and Customs, which sounds like a lot of money but was only 0.65 per cent of total UK tax revenues.  It also has plenty of loopholes.  The most important are the seven-year rule (it doesn’t catch anything given away more than seven years before the death of the donor), an exemption on transfers between spouses, and the nil-rate band which taxes at 0 per cent anything up to a specified threshold, currently £325,000 per individual.  The combination of the seven-year rule and the nil-rate band mean that it’s largely an optional tax, hitting the well- and comfortably-off who are disorganised; indeed, the joke in tax classes is that it’s a charge on those who hate their relations more than the Revenue.

So – if the news that IHT is to bear the burden of increasing resources to pay for the new ‘social care cap’ in England is right (see BBC News here, and Sunday’s Telegraph here) – the upshot is rather confusing.  An additional tax burden will be imposed on residents of all parts of the UK, including Scotland, Wales and Northern Ireland as well as England – to pay for a benefit only to be experienced in England.  That is anomalous.

There are two ways to resolve this problem.  One is to allocate shares of the extra tax revenues so generated to devolved governments in Scotland, Wales and Northern Ireland, since social care for the elderly is a devolved function.  That is attractive, and would be the sort of approach sought by Quebec, where the long-standing demand of the provincial government has been to call for an ‘opt out with compensation’ from expansions of the Canadian federal government’s social programmes.  However, that might not be in devolved governments’ best interests – the tax base that supports inheritance tax revenues is driven by property values, and so hugely skewed toward southern England.  (In Scotland, according to GERS, it only generated 0.4 per cent of total tax revenues in 2010-11.  It’s only 0.37 per cent in Wales according to the Silk Commission report, and 0.33 per cent in Northern Ireland, according to the Northern Ireland Net Fiscal Balance Report.)  Getting those extra tax revenues from the tax base in Scotland, Wales or Northern Ireland would in fact mean a larger share of a smaller cake.  That’s all the worse for Scotland and Northern Ireland given their ageing populations.

The alternative approach would be to let the Barnett formula take the strain, and allocate to devolved governments their consequential share of increased UK Government spending in England.   This is what Barnett is meant to do, after all – allocate consequential shares of spending on ‘comparable’ functions in England to devolved governments.  It appears that the increased IHT revenue will only bear part of the cost of increasing resources for the care cap, so the rest will presumably come from general taxation anyway.  Using Barnett would in fact put rather more funds into the hands of devolved governments, albeit at the expense of English taxpayers, but in a way that accomplishes a form of equity in distributing shares of the cost of the English policy across the UK.

If the latter is the approach to be taken, it should form part of the Department of Health’s formal announcement.  The pre-announcement briefings have suggested a UK-wide tax to fund a purely English policy, which may make electoral sense for the Conservatives but not much constitutional sense (and that’s without judging whether this policy approach is in fact right or not – given that it has been criticised by Andrew Dilnot as well as Labour spokespeople).  It looks rather like the sort of high-handed approach from Whitehall that has been all too common in the past – and which in the present context strengthens arguments for independence in Scotland.  (Of course, it also sits on top of the UK Government’s exclusion of claims for attendance allowance from beneficiaries of that policy after free long-term care for the elderly was introduced.)  It also suggests that a more nuanced approach to welfare devolution may be hard to implement, because doing so is beyond Whitehall’s habitual ways of working.

What this is not is a case for devolving inheritance tax.  IHT is one of few taxes emphatically not suitable for devolution on fiscal grounds.  Experience in both Canada and Australia of transferring the death/estates duty tax base to the provinces/states was that within a decade, tax competition between the various governments drove the rate of tax to zero across the whole country.  There are few cases where the evidence of fiscal competition cannibalising a tax base is so clear.

Thinking about social care costs is actually a tricky challenge.  It involves redistribution across time as well as space.  At present, devolved governments have the responsibility for providing care, but not the policy or legal instruments to secure its funding.  The way the UK Government has ploughed ahead making policy for England with so little regard for the position of devolved governments has done it few favours.

UPDATE: This post was written just before Jeremy Hunt made his statement in the Commons (which is available here) or the Department of Health published its white paper Caring For Our Future: Reforming care and support, Cm 8378 (available here).  There’s no mention in the white paper of the use of changes in inheritance tax (or NICs transferred from the soon-to-be-discontinued second state pension) to fund the new policy.  Indeed, for that matter there’s no mention of devolved governments or institutions at all.

Yet the white paper notes, without irony, ‘Fragmented health, housing, care and support are letting people down.  A failure to join up also means that taxpayers’ money is not used as effectively as possible, and can lead to increased costs for the NHS’ (p. 16).  Moreover, the DH statement says, ‘A national minimum eligibility will make access to care more consistent around the country, and carers will have a legal right to an assessment for care for the first time.’  All that is true, but applies as much to policy across the UK as that within England.  When directly asked about the devolution implications in the Commons, by Willie McCrea from South Antrim, Hunt stalled, saying ‘different approaches are being tried in all four constituent parts of the United Kingdom and we must look at what is happening in the different parts and all learn from each other.’

The UK Government has set out a policy only for England, which affects devolved governments and their policy functions quite significantly – but without there being any apparent assessment of its impact on them, or the fact that the UK Government possesses and is using policy levers that are not available to them despite their similar responsibilities.  This is simply confused policy-making; and the fact that the financing was discussed in the press and Commons statement, but does not appear in the published documents, suggests it was made rather late in the day too.

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4 Comments

Filed under Conservatives, Devolution finance, Intergovernmental relations, Northern Ireland, Policy issues, Scotland, Wales, Whitehall

4 responses to “Inheritance tax, ‘care caps’ for the elderly, and devolution

  1. Oldnat

    Seems that the UK Government isn’t much interested in your ideas as to how to make the UK work better together. Time to give it up as hopelessly unreformeable.

  2. Dan Langfen

    What a load of claptrap, the £75000 cap only makes England less worse off than the Celts, social care is free in Scotland and almost free in Wales, Why? because of the over generous Barnett formula. What is anomalous is the economic, social, cultural and most importantly democratic deficit England faces across the board at the hand of the British elite and the botched devolution arrangements.

  3. Dave

    Oldnat: I agree that the Westminster system is unreformable. It is anathema to the Tories. It represents the privileged elite which has governed in its own interests for centuries. These days it’s almost impossible to differentiate between Labour and the Tories, so the same applies. As for the LibDems, their claim to be a party of constitutional reform has been shown to be a joke.

  4. Chris

    I do not see why IHT can not be devolved- the Canadian/Australian examples could be applied to any tax. For devolution to work, it must be ‘home rule all round’ with each constituent part having the same fiscal autonomy; this would stop the situation where UK taxes are being raised specifically to fund English policy (as in this case).

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