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Inheritance tax, sometimes dubbed ‘Britain’s most hated tax’, currently stands at 40 per cent and is paid on estates worth over £325,000, although there are a range of exemptions which mean only five per cent of deaths are taxed and often at a much lower effective rate. As the Chancellor prepares to review taxes in the Autumn Budget, what should she do with IHT?
Scrap it completely
There can be no doubt that a reduction in inheritance tax is unambiguously off the table under this new government. A lesson in the use of power. The Conservatives had 14 years to reform this horrible levy; yet only tinkered around the edges.
For the left, this a tax cut for the wealthiest few, with only four per cent of estates are subject to inheritance tax. We’re unlikely to see any tax cuts at all. But if we do, it certainly won’t be this one.
Yet have our new overlords asked themselves why it is such an unpopular tax?
To start with, a YouGov poll in July 2023 suggested that 31 per cent thought the tax would have to be paid on their assets when they died. This disparity is explained partly by the fact that four per cent of estates encompasses far more than four per cent of the population. Many people are impacted by the death of an individual.
But it’s also explained by that instinct that drives so many: aspiration.
While people may not currently have assets sufficiently valued to attract the tax, they may hope to one day have such an estate, perhaps through improvements to their home, or working that bit longer to set their families up when they pass on.
Sure, you need to have a home worth over £1 million in order to be liable for the tax in many cases, but in London this is an increasingly unremarkable price for housing.
Meanwhile, the truly super wealthy, with long-term tax planning, can exploit the numerous barmy carve-outs to drive their liabilities right down. It’s the middle class that are really hit in the end.
A cut to this complicated death duty is long overdue, but don’t hold your breath.
Elliot Keck is head of campaigns at the Taxpayers’ Alliance
Raise it
The new government has said that there will be no return to austerity, despite inheriting spending plans that imply major cuts. With the public finances stretched, significant tax rises will be needed on top of those set out in Labour’s manifesto. And if the Chancellor is looking for options that fall on those with the broadest shoulders, and don’t break her commitments to not raise Income Tax, National Insurance or VAT, inheritance tax is a good place to start.
The Chancellor should begin by tackling the reliefs that allow the very wealthy to avoid paying their fair share, and undermine public trust in the tax. Ending business and agricultural reliefs and bringing pension pots into the tax could raise £2bn a year. It is of course important that the government should support growth, but these tax biases are not well-grounded or cost-effective ways of doing that.
More broadly, while inheritance tax could benefit from many reforms, policy should not shy away from raising more from this tax in total. The revenue it raises is still tiny compared to inheritances overall. And fundamentally it is fair that we should tax the receipt of unearned inheritances, given that we tax income earned through hard work. For example, someone might inherit £1m of wealth from their parents and face zero tax, while others would need an entire lifetime of full-time work to earn £1m, on which they would pay plenty of tax. Public services need funding and inheritance tax should play a role.
Adam Corlett is principle economist at the Resolution Foundation
