Britain’s wealthiest 1% would enjoy half of the gains from scrapping inheritance tax, new research shows, as Prime Minister Rishi Sunak considers proposals to revive his Conservative Party’s flagging ratings before a general election expected next year.
(Bloomberg) — Britain’s wealthiest 1% would enjoy half of the gains from scrapping inheritance tax, new research shows, as Prime Minister Rishi Sunak considers proposals to revive his Conservative Party’s flagging ratings before a general election expected next year.
The Institute for Fiscal Studies found that abolishing the levy on assets would provide an average £1.1 million ($1.3 million) tax cut to the estates of those who die leaving £2.1 million or more.
Scrapping the tax would also come at a growing fiscal cost at a time when the public finances are under strain. In a report Wednesday, the IFS estimated that inheritance tax is set to raise £15 billion for the exchequer in a decade’s time, more than double the £7 billion currently.
Sunak’s government is reported to be considering cutting or abolishing inheritance tax to help close the gap with the opposition Labour Party in opinion polls.
The levy is deemed the most unfair by voters in polling, with an increasing number of Britons set to be caught up in the tax over the next decade due to the surge in wealth among older generations.
Reducing or scrapping IHT could help the Tories in wealthier “blue wall” seats in the south of England being targeted by Labour and the Liberal Democrats. Ending the tax would deliver around £3.3 billion to wealthiest estates, the IFS says.
However, ditching it could open the government to accusations of cutting taxes for the rich and raise questions about how to fill a multi billion-pound hole in the budget.
“Like all taxes, it supports vital public services. Abolishing it or scaling it back would mean either cutting such services, raising other taxes or increasing the national debt,” said Mark Franks, director of welfare at the Nuffield Foundation, which helped fund the research.
Only a fraction of UK families are actually liable for inheritance tax as they do not have enough wealth. The UK tax authority said in July that just 3.7% of UK deaths resulted in an inheritance tax charge in 2020-21.
When someone dies, the tax is charged at 40% on assets valued over £325,000. Other reliefs and allowances mean that the amount passed on tax-free is often much higher, so estates up to £500,000 can be passed onto children or grandchildren without charge. That figure can rise to £1 million when the allowance of the first deceased spouse or civil partner is included
By 2033, one in eight Britons will have inheritance tax due either on their death or their partner’s death, the IFS estimates. In London, where house prices are double the national average, almost a quarter of people will be liable.
The IFS said that reforms to the tax could help raise an extra £4.5 billion from the tax.
“The government should abolish the special treatment given to business assets, certain types of shares, agricultural assets, pensions and homes passed to direct descendants,” said David Sturrock, a senior research economist at the IFS. “These exemptions and reliefs open up channels to avoid inheritance tax.”
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