Yet another secret is out: while David Cameron promised tax transparency, he was privately preventing EU moves to force open secretive trusts, in which Britain uniquely abounds. He protested against “£122bn of property in England and Wales owned offshore bought with plundered or laundered cash”, yet time and again it emerges that the prime minister was blocking EU clean-up efforts. Currently he has stopped the blacklisting of our offshore treasure island havens, where the Panama Papers reveal so much untaxed dosh is stashed. The papers have opened up so many other secrets too.
Cameron stepped in to shield offshore trusts from EU tax crackdown in 2013
The FT on Thursday revealed that in 2013 Cameron stopped moves by the EU to prevent money laundering in order to protect trusts from revealing the owners who truly benefit. The Dutch MEP piloting through the legislation said the UK used “privacy arguments” to justify exempting trusts, which she regarded as a dangerous loophole. Indeed it is. Pathetically, Downing Street tried to explain this was because Cameron feared including trusts “would distract from action against those areas of most concern, such as shell companies”.
Trusts have been partially reformed, but they go to the very heart of British tax avoidance culture. Look up any tax adviser and “wealth management” company, and protecting family money from inheritance tax is the core business they advertise. Trusts are a very British disease, great conveyors of privilege from one generation to the next.
Inheritance is what brought these Tories to power, in every sense. The day George Osborne dropped a tax bombshell in 2007, promising he would exempt estates up to £1m from inheritance tax, he terrified Gordon Brown into abandoning plans for an election he might have won. Instead, in the 2010 election, Osborne’s bogus threats against Labour’s “death tax” to raise money for social care helped win the day.
Generosity to the rich only generates greed for more
Inheritance tax (IHT) has a deep political history in Britain. It helped break up vast estates and spread wealth, making the late 1970s the most equal time in British history. But first Margaret Thatcher then New Labour weakened IHT, and now Osborne takes an axe to it, with special protection for the “family home”. The Institute for Fiscal Studies says the £1m exemption will lose the Treasury £5.8bn.
But this generosity to the rich only generates greed for more. The Sunday Telegraph’s front page this week headlined “Anger of middle-class savers as bill for ‘devious’ inheritance tax tops £4bn”. The sum rises because the very wealthy have so much more, year on year. “Middle class” they certainly aren’t: the Office for Budget Responsibility finds only one in 20 estates pay it now, and the property boom will increase that to just one in 10 families. As ever, that useful fiction of the “middle class” excludes the 90% who will never have the £1m needed to pay any IHT. After all, the poorest 55% of the UK population combined own only as much as the top 1%. Property price rises brings in more IHT – but this is unearned wealth of the top 10% that has never been properly taxed.
Anyone left of centre holds inheritance tax as a sacred totem of social justice. After all, fewer young people can ever own homes without parents to pony up a deposit. Social mobility is falling: in 1991 17% of top earners came from low-earning families, but that fell to 13% by 2000, with 42% from the richest families. Is there revolution in the air? Alas not.
Deep in the psyche of this feudal-minded nation, with its monarchy, peerage and crown-protected tax havens, inheritance tax is detested by those who will never pay it. So misled have people been by the barrage of bogus stories about the taxman coming after their hard-earned savings that almost every home-owner wrongly fears small bequests will be snatched from their children. Labour voters are almost as opposed as Tory voters.
Take a deep breath – now is the time for Labour to declare it will abolish inheritance tax altogether. The argument is lost, the public’s ears are blocked. Although people overwhelmingly say the country is too unequal, Ipsos Mori finds 70% hate IHT, calling it “unfair”. They like high income taxes for the rich – the 50p rate was popular – but not IHT. Sad, but true.
Jean-Baptiste Colbert, Louis XIV’s finance minister, famously warned that the art of taxation is to “pluck the goose to obtain the largest amount of feathers with the least possible amount of hissing”. IHT gets one big hiss. So the Fabian Society has come up with a far better solution. Instead of taxing an estate, tax whatever gifts and bequests people receive as part of their ordinary taxed income. At present under the seven-year rule – if parents live for a magic seven years after giving a gift – then any pre-death gift is tax-free.
Allowing a tax-free threshold for lifetime gifts, the principle should be to tax all income the same, earned and unearned, from capital gain or sweat of brow, whatever its source. Working hard for your money should no longer be taxed the hardest while increases in unearned wealth virtually escape. At a stroke all the wheezes, cheats and exemptions would be swept away. At a stroke, there would be no point in these secretive trusts. No more special pleas from Cameron for the fine old British trustafarian tradition.
The magic of the Panama Papers opens up dirty secrets of the greedy rich, sending anyone with a reputation to save scuttling to pay their taxes. But above all, it opens the eyes of the public.