<?xml encoding=”utf-8″ ?????????>
Scrapping inheritance tax would cost the government almost £15bn a year in lost revenue by 2032, according to analysis by the Institute for Fiscal Studies that follows calls from Tory MPs for the main tax on inherited wealth to be abolished.
The thinktank said the latest figures from HMRC showed fewer than 4% of estates paid inheritance tax (IHT) in 2020–21, but the rapid growth in wealth among older individuals meant this number was set to rise to more than 7% over the next decade.
While London has the most estates liable to pay the tax, hotspots across Sussex, the Cotswolds and around Birmingham will have the greatest number per 100,000 residences.
The IFS report, Reforming Inheritance Tax, found that in 2024, the wealthiest fifth of donors will bequeath an average of £380,000 per child, and pay inheritance tax of about 10% of this amount.
By contrast, the least wealthy fifth of parents will leave less than £2,000 per child.
The authors estimate that if the amount of money bequeathed through inheritances next year were to be equally shared between all 25-year-olds, each would receive about £120,000.
Rishi Sunak is understood to be considering an inheritance tax cut as he attempts to woo voters and create clear dividing lines with Labour.
Though Downing Street has sought to play down speculation that the prime minister was drawing up plans to abolish the tax, calls for reforms that allow households to pass on more of their assets are mounting in the Conservative party.
Nadhim Zahawi, a former chancellor, called inheritance tax “morally wrong” and a “spectre that haunts us alongside death” in an article for the Telegraph in the summer.
Anthony Browne, the Tory MP for South Cambridgeshire, said recently that he was concerned that without reform, many middle-income households would pay large sums while the super wealthy used trusts and other loopholes to avoid paying the tax.
Inheritance tax is charged at 40% on wealth over £325,000. Individuals then have an extra £175,000 allowance towards their main residence if it is passed to children or grandchildren, and spouses can share their allowances. This takes the allowance to £1m between a married couple, allowing them to distribute a seven-figure sum tax-free.
It is understood that among the proposals under consideration by Sunak is for the 40% rate to be reduced, paving the way to abolish it in future years.
The IFS said the cost of abolishing IHT would be £7bn if implemented this year with about half (47%) of the benefit going to those with estates of £2.1m or more at death. These 1% of estates would benefit from an average tax cut of an estimated £1.1m in their bill.
“The 90% or so of estates not paying inheritance tax would not be directly affected by such a reform,” it said.
A spokesperson for the Treasury said: “More than 93% of estates are forecast to have zero inheritance tax liability in the coming years – however, the tax raises more than £7bn a year to help fund public services millions of us rely on daily.”
In the report, the authors Arun Advani, a University of Warwick tax specialist, and IFS researcher David Sturrock, said inheritance tax should be reformed initially to prevent the super-wealthy using loopholes to benefit their descendants.
They called for an end to exemptions worth £4.5bn year for those who inherit businesses and farms, saying that the abolition of business relief alone would allow the government to raise the threshold to £500,000 and £525,000 if farm relief was also cut.
As an alternative, the reforms would allow the tax rate to be cut from 40% to 25% while being revenue-neutral.
The report said: “Taking a longer-term view, the rapid growth of wealth compared with earnings over the past several decades has brought with it questions about the balance of taxation across generations and the growing role of parental wealth transfers in driving differences in life outcomes within today’s working-age generations.
“Inheritances have grown, and are expected to continue to grow, faster than earnings, meaning that they are projected to have a growing negative impact on intergenerational mobility.”
