Calls to overhaul inheritance tax

28 November 2018

Calls for complete overhaul of ‘unfit’ inheritance tax system

Inheritance tax should be scrapped, and replaced with a fairer system that would be harder to dodge, thinktank the Resolution Foundation has said. In its latest report into how to tackle unfairness between the generations, the thinktank, chaired by former Conservative minister David Willetts, says inheritance tax is by far the most unpopular tax.

Despite being levied only on the largest 4% of estates, and raising just 77p of every £100 of taxation, it is widely regarded by the public as unfair.

Adam Corlett, senior economic analyst at the Resolution Foundation and the report’s author, said: “Inheritances are already worth over £100bn a year, and their doubling over the next 20 years means they are going to play an even larger role in shaping British society.

“But the current system of inheritance tax is not fit to deal with this societal shift. It currently manages the uniquely bad twin feat of being both wildly unpopular and raising very little revenue.”

Instead, Resolution proposes a “lifetime receipts tax”, that could allow beneficiaries to inherit a lump sum before they paid any tax on it – and potentially raise extra revenue for the Treasury.

Its analysis suggests by setting such a lifetime limit at £125,000, and then levying inheritance tax at a lower rate of 20% up to £500,000 and 30% after that, the government could still raise an extra £5bn by 2020-21.

Taxing individual recipients of bequests rather than the estate as a whole, could also give parents an incentive to spread their largesse more widely.

The thinktank warns that inheritance tax is too easy to avoid, in part because of reliefs, including those for capital held in agricultural land and shares on the hi-tech AIM market.

These exemptions, which cost the Treasury £1bn a year, were intended to protect farmers from having to break up their estates and encourage entrepreneurial investment. But Resolution claims they are widely abused as a way of avoiding inheritance tax.

Wealth taxes have risen up the political agenda, with the government facing mounting pressure to find ways of increasing spending on public services including the NHS.

But the Conservatives’ ill-fated proposals for funding social care in last year’s general election manifesto underlined the political risks involved.

Labour has said it will examine the case for a land value tax, charged each year at a small percentage of a property’s price – but the Conservatives have attacked the idea as a “garden tax”.

The Treasury-backed Office of Tax Simplification is currently seeking the views of the public on how best to reform the inheritance tax system.