Rishi Sunak is widely reported to be considering a pledge to reduce – or possibly even to abolish – inheritance tax (IHT) in the Conservative manifesto at the coming General Election. This follows a campaign by the Daily Telegraph and calls from a growing number of Conservative MPs. It’s presented as part of a strategy to shore up Tory votes in the so-called ‘blue wall’, where Conservative MPs face a threat from Liberal Democrats as well as Labour.
It’s worth considering what this would mean, and who it would benefit.
A bung to the wealthy
The current inheritance tax threshold on an estate is £325,000, with a tax of 40% levied on the value of the estate above that (there are exceptions relating to charitable gifts and transfers of liability between spouses). It raised £5.8bn for the Exchequer in 2020-21.
It is claimed that inheritance tax is unfair because it taxes dying; that it taxes money that has already been taxed once; and that it’s only right that people who have worked hard to build up their wealth should be able to provide for their surviving families without handing over a large chunk in tax.
A quick look at the statistics for 2020-21 – the latest complete numbers available at the time of writing – provides a salutary dose of reality.
- Fewer than 4% of estates – 27,000 in total – paid inheritance tax
- Where the value of the estate is less than £1mn, the bulk of it is likely to be made up of residential property and cash. Where it is over £1mn, the bulk is more likely to be securities and other assets
- Estates over £1mn accounted for 81% of the tax revenue, but less than half the total number of estates
- Nearly half of all inheritance tax liability relates to estates in London and the South East. By way of contrast, only £116mn of the £5.8bn total was paid on estates in Wales
In other words: inheritance tax is only paid on a very small minority of estates, and overwhelmingly by those of the very-well off. Its abolition would amount to a bung for the families of the very wealthy.
In a forthright response to the proposal, Paul Johnson of the Institute of Fiscal Studies wrote in The Times that abolishing IHT at a time when the public finances were facing enormous pressure would be frivolous and irresponsible; we need to get used to the fact that there is no scope for tax-cutting in the foreseeable future.
But he also makes the point that inheritance has been an increasingly important factor in driving falling social mobility. It is well documented that inheritance has been growing as a share of national income since the 70s; this has meant that parental income has become increasingly important in determining lifetime incomes, with an obvious effect on inequality.
For example, research by the Nuffield Foundation concludes that for those born in the 80s, inheritance will increase lifetime income by 5% for those born into the bottom fifth of the wealth distribution, but by 29% for those born into the top fifth. That is a significant increase over the effect on those born in the 60s. Moreover, the expectation of inheritance has a significant effect on household spending and saving patterns earlier in life.
It reflects a wider trend in which the proportion of national income from wages has declined significantly in recent years, while rentier income – from profits, dividends and rents – has increased and accounted for the bulk of income growth in recent years, in particular since the crash of 2008. But above all, it represents the effects of massive house-price inflation.
In other words, if we are concerned about fairness and equality, we should not only be looking at shifting the tax burden away from taxes on income to taxes on property and wealth, but we should be considering whether there is a case for increasing taxes on inheritance – certainly relative to taxes on pay. The growing and destructive centralisation of the UK economy to London and the South East is a further reason why we should do this.
And the argument one sometimes hears that IHT represents unfairly paying tax on income twice seems to me to be flawed. It’s tax, not on income, but on a windfall, paid by the recipient. We already do pay tax on income on which tax has been paid once – when we pay VAT, or excise duties. The principle of reclaiming tax that one has already paid only applies to Gift Aid on charitable donations (and it’s worth remembering that it’s the principle at the root of the enormous tax privileges enjoyed by private schools).
A rentier economy
The arguments about inheritance tax go right to the heart of the way in which the UK economy has developed in recent decades. We have become, increasingly, a rentier economy – one in which real wages have steadily fallen, while those who speculate sweat assets, and draw rent and dividends have prospered, with soaring inequalities and insecurity for those on the lowest incomes.
If we are concerned about that, abolishing inheritance tax is absolutely the wrong thing to do.
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