Where to put the inheritance tax?

Inheritance tax, sometimes called “Britain’s most hated tax”, is currently 40 per cent and is paid on estates worth over £325,000, although there are a number of exemptions that mean only five per cent of deaths are taxed, and often at a much lower effective rate. What should the Chancellor of the Exchequer do with inheritance tax as she prepares to review taxes in the autumn budget?

Scrap it completely

There is no doubt that a reduction in inheritance tax is clearly off the table under the new government. A lesson in the exercise of power. The Conservatives have had 14 years to reform this terrible tax, but have only tinkered around the edges.

For the left, this is a tax cut for the wealthy few, since only four percent of the estate is subject to inheritance tax. It is unlikely that we will see any tax cuts at all. But if we do, it certainly won’t be this one.

But have our new overlords asked themselves why this tax is so unpopular?

First of all, a YouGov poll in July 2023 found that 31 percent of respondents believed their wealth should be taxed after their death. This discrepancy can be partly explained by the fact that four percent of estates cover far more than four percent of the population. The death of a person has many effects.

But it can also be explained by the instinct that drives so many: the pursuit of strength.

Although someone may not currently have enough wealth to be taxed, they may hope to have such wealth one day, perhaps by making improvements to their home or by working a little longer to provide for their family after they die.

Of course, in many cases your home will need to be worth over a million pounds to be taxable, but in London this is an increasingly unremarkable price for housing.

Meanwhile, the really super-rich can use long-term tax planning to take advantage of the many crazy exemptions to significantly reduce their liabilities. In the end, it is the middle class that suffers the most.

A reduction in this complicated inheritance tax is long overdue, but don’t expect any nasty surprises.

Elliot Keck is campaign director for the Taxpayers’ Alliance

Increase it

The new government has said there will be no return to austerity, although it inherits spending plans that entail significant cuts. With public finances stretched, significant tax increases will be needed in addition to those envisaged in the Labour manifesto. And if the Chancellor of the Exchequer is looking for options that burden those with the broadest shoulders and does not break her promises not to raise income tax, national insurance contributions or VAT, inheritance tax is a good place to start.

The Chancellor of the Exchequer should first tackle the tax breaks that allow the super-rich to avoid paying their fair share and undermine public confidence in the tax. Removing the tax breaks for businesses and farmers and bringing pension funds into the tax could raise £2 billion a year. Of course it is important that the Government supports growth, but these tax breaks are neither well justified nor cost-effective in achieving this.

More generally, while inheritance tax could benefit from many reforms, policymakers should not shy away from getting more out of it overall. The revenue it raises is still small compared to total inheritances. And fundamentally, it is fair to tax the receipt of unearned inheritances, because we also tax income earned through hard work. For example, someone could inherit a million pounds’ worth of wealth from their parents and not have to pay tax on it, while others would have to work full-time all their lives to earn a million pounds, on which they would pay plenty of tax. Public services need to be funded, and inheritance tax should play a role in that.

Adam Corlett is chief economist at the Resolution Foundation