Passing on: options for reforming inheritance taxation

Published on Intergenerational Centre, Tax and Welfare

Over the past 18 months, research for the Intergenerational Commission has illustrated how the assumption that each generation will do better than the one before it is under pressure. This paper is one of a series that moves beyond the diagnosis of these problems to consider what action is needed to address generational living standards challenges. In this paper, our focus is inheritance taxation.

With inheritances growing rapidly in importance at the same time as fiscal pressures, inheritance taxation must play its role in raising revenue in a fair way. But the current Inheritance Tax system manages to raise relatively little while also being especially unpopular. It is seen as unfair for three main reasons: taxing giving is seen as a bad thing, as is the tax’s explicit link to death; it has a high rate; and it is seen as easy for the richest to avoid due to its wide range of exemptions. This paper proposes a Lifetime Receipts Tax that would address these problems while also encouraging individuals to spread their wealth wider and raising revenue to help fix Britain’s intergenerational contract.

  • Abolish Inheritance Tax and replace it with a Lifetime Receipts Tax, paid by the beneficiary
  • Give each person a Lifetime Receipts Tax Allowance of £125,000
  • Beyond the Lifetime Receipts Tax Allowance, apply a progressive rate schedule with a basic rate of 20 per cent and a higher rate of 30 per cent above £500,000
  • All lifetime gifts would be included in the tax, excluding those of £3,000 or less, but transfers between spouses would be exempt
  • Despite lower marginal rates, such a tax would raise £5 billion more than Inheritance Tax in 2020-21
  • Existing reliefs such as Business Property Relief and Agricultural Relief (which together cost £1.2 billion), the treatment of inherited pensions, and the forgiveness of Capital Gains Tax at death (costing another £1.2 billion) should also be tightened to reduce the scope for tax avoidance