Inheritance tax raises too much money to be scrapped – expect replacement taxes if it goes
Inheritance tax actually raises more than you think for the Treasury, says Nimesh Shah
Sunak lays down the pre-election “tax gauntlet” to abolish Inheritance Tax…
Rishi Sunak is out of the blocks, as the Conservative Government begins its General Election posturing by developing plans to abolish Inheritance Tax.
The Labour opposition had already drawn its key battle ground lines by pledging to abolish the non-dom regime, introduce VAT on private school fees and increase taxes on private equity executives. The Conservatives have taken their time to react on their own tax agenda, and they’ve now gone for a ‘big one’ by suggesting that they will completely abolish the ‘most hated tax in Britain’ that has been around since the 17th century.
But can a future Conservative Government abolish Inheritance Tax without anything in its place, and will the Treasury bean counters be able to stomach the lost tax revenue?
Fact check – Inheritance Tax actually raises more than you think for the Treasury. Inheritance Tax generated £600 million in July 2023 alone – and receipts are £1 billion higher in the year to July 2023 than same 12 months prior. Inheritance Tax receipts have been trending upwards since the Coalition Government in 2010 and under subsequent Conservative majority governments. In 2010/11, Inheritance Tax was worth less than £3 billion to the Treasury, representing around 0.5% of total tax receipts. In the current tax year, the Office of Budget Responsibility is forecasting Inheritance Tax to raise £7.2 billion rising to a massive £8.4 billion by 2027/28 – representing over 1% of total tax receipts.
To put Inheritance Tax receipts into context, the Labour Party’s proposal to abolish the non-dom tax status claims to generate £3.2 billion per annum which would apparently pay for 7,500 more doctors and 10,000 more nurses and mid-wives a year.
One of the policy objectives behind Inheritance Tax is re-distribution of wealth, although there are serious question marks around whether it serves this purpose because of how it currently operates. Inheritance Tax effects the wealthiest households with the top 10% of estates accounting for almost entirely the total tax take. Abolishing Inheritance Tax would benefit the wealthiest 4%.
Opponents to Inheritance Tax have made compelling arguments to abolish it – the primary argument being that people should be able to freely pass on assets to whomsoever they wish when they have already paid Income Tax on earning the money, VAT on the purchase of most services and assets and Capital Gains Tax on investment growth. It is double taxation, but this exists throughout the UK system.
But if you abolish Inheritance Tax, the Government presumably needs to replace it with something else or increase other taxes to reflect that there would be no tax levied on a person’s death. To balance the books, the Government would need to look at reducing the state pension by 7% or increase Income Tax rates by 1%, or possibly both.
I am sceptical that any Government can ‘say goodbye’ to over £7 billion of Inheritance Tax – however, the current system isn’t working and overhauling Inheritance Tax, alongside the wider capital taxes regime needs to be considered to achieve the policy objectives. Messrs Sunak and Hunt haven’t been kind enough to share their Inheritance Tax plans with me (yet) – but if the Conservatives are re-elected, I can see a future system where Inheritance Tax is no more, and it has been replaced with a lifetime gifting allowance and Capital Gains Tax on death. Across the pond in the US, there is a lifetime estate and gift exclusion of $12.92 million before tax becomes payable. A simple lifetime gifting allowance would be combined with applying Capital Gains Tax on death, currently 20%, and 28% for residential property. I personally favour this option as it would considerably simplify the system and harmonise our two main capital taxes.
I cannot see a situation where Inheritance Tax would be abolished overnight – it will likely be a phased introduction by first increasing the threshold at which becomes payable to (say) £2 million and reducing the Inheritance Tax rate to 20%. This would be coupled alongside removing the current “7 year rule”, which presently allows the wealthiest estates to legally and practically avoid Inheritance Tax through simply giving away their worldly assets 7 years prior to the death.
Abolishing Inheritance Tax is definitely a headline grabber, and history suggests it may even be a vote winner – but when the size the national debt is close to size of the UK economy, waving goodbye to £7 billion will be more difficult than a cliff edge ending, and the final version (if we get a Sunak sequel) will be something quite different than many may expect today.
This article was first published on inews.co.uk