Scrap Inheritance Tax and replace it with one that is fairer to families and harder to avoid

Published on Intergenerational Centre, Tax and Welfare

Inheritance Tax should be abolished and replaced with a new system that commands greater public support by being fairer to families and harder to avoid, according to a new report published today (Wednesday) by the Resolution Foundation for the Intergenerational Commission.

Passing on, the 21st report of the Intergenerational Commission and last before it publishes its final report next week, highlights the growing importance of inheritances in shaping Britain over the coming decades.

It notes that inheritances have doubled over the last 20 years – hitting over £100bn in 2015/16 – and are forecast to double again over the next two decades as Britain’s record levels of wealth are passed on through families.

However, while the increase will benefit many millennials, the Foundation warns that inheritances will not be able to deal with the big economic challenges facing families or the country.

For families, that’s because the most common age at which the current millennial generation are expected to inherit is 61 – far too late to help with buying a home or bringing up children.

For the state, Inheritance Tax does a poor job of collecting revenue. It accounts for just 77p of every £100 raised nationally, and just 4 per cent of estates are now subject to it.

The Foundation says that Inheritance Tax is not fit to deal with wealth in modern Britain because, despite its limited revenue raising ability, it is regarded as Britain’s least fair tax. This unpopularity is due in part to it being perceived as a tax on the dead, having a high marginal rate of 40 per cent, and because it is often seen as merely a voluntary tax for the very rich and well advised.

To address these issues the report calls for the scrapping of Inheritance Tax and replacing it with a new Lifetime Receipts Tax, with a much lower rate.

Those benefiting from any inheritances would be taxed instead of the deceased’s estate – but only for any inheritances beyond a lifetime allowance. This would have the added benefit of encouraging families to spread their wealth, as each beneficiary would have their own tax allowance.

The report adds that this new approach would significantly reduce the scope for the very rich to reduce their tax bills by making large gifts well before passing away, something ordinary families whose assets are largely tied up in a house are unable to do. It also sets out proposals to restrict business property and agricultural reliefs (which together cost the Exchequer over £1 billion a year) to their original purpose of helping genuine family businesses and farmers.

Under the current system, individuals can – and do – minimise their inheritance tax liabilities by buying up agricultural land or investing in AIM shares – without having to farm that land or have any relationship with the firms they have invested in.

Finally, the report shows that applying an allowance of £125,000 to a Lifetime Receipts Tax, followed by a 20p rate up to £500,000 and 30p after that, would reduce the marginal rate of tax on wealth transfers significantly while still raising up to £11bn in 2020-21 (compared to the £6bn that the current system is projected to raise).

Adam Corlett, Senior Economic Analyst at the Resolution Foundation, 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.

“Rather than tweak our failed inheritance tax system, it should be scrapped altogether and replaced with a new Lifetime Receipts Tax. This new system would be fairer to families, harder to avoid and would ensure our tax system keeps up with 21st Century Britain.”

Notes to Editors

  • Embargoed copies of Passing On are available from the press office.
  • In a 2015 YouGov Poll, Inheritance Tax was seen as the least fair of 11 major taxes, with 59 per cent considering it ‘unfair’ and 22 per cent as ‘fair’.
  • Last week, the Office for Tax Simplification opened a consultation seeking views on the current Inheritance Tax system.
  • For more information contact Rob Holdsworth on 020 3372 2959 or 07921 236 972.