In a move that has sent tremors throughout the UK’s financial landscape, Prime Minister Rishi Sunak is rumoured to be set to announced plans to abolish inheritance tax (IHT) at the Conservatives Party conference next month.
Cutting the levy before eventually abolishing it entirely is one of a raft of crowd-pleasing announcements being considered before next month’s Conservative Party conference.
The proposal, which is set to drastically alter the country’s taxation system, has been met with both commendation and criticism in equal measure.
Under current rules, IHT is levied at 40% on estates valued over £325,000 for an individual or £650,000 for a couple.
However, Sunak’s proposal means the controversial tax, often dubbed a ‘death tax’, described by both Nadhim Zahawi and Jacob-Rees Mogg as ‘morally wrong’ would be abolished entirely. This move would see the UK joining the ranks of countries like Australia and Canada, which have already eliminated inheritance tax.
One proposal being considered is for Sunak to announce his intention to phase out the levy by reducing the 40 per cent inheritance tax rate in the budget in March, while setting out a pathway to abolish it completely in future years.
Potential Impact on Individuals
The abolition of IHT could potentially provide significant financial relief for those set to inherit estates. Without the burden of a 40% tax, beneficiaries would stand to inherit entire estates, thereby potentially increasing wealth for future generations. For wealthy families, this could mean significant savings.
However, critics of the proposal argue that it could exacerbate wealth inequality, as it primarily benefits the wealthiest households. They argue that the inheritance tax, in its current form, plays a crucial role in wealth redistribution.
Impact on the Economy
The Office for Budget Responsibility (OBR) estimates that IHT brings in around £5.4 billion a year, accounting for less than 1% of the total tax revenue. Despite its relatively small contribution, the abolition could still leave a gap in the UK’s public finances.
Some economists argue that the loss could be offset by increased spending and investment, stimulated by the additional wealth retained by beneficiaries. However, others caution that the impact would likely be limited, given that IHT revenues are relatively small compared to other taxes.
Sunak’s proposal has sparked fierce debate in the political arena. Supporters argue that the IHT is an unfair form of double taxation, taxing wealth that has already been taxed. However, opponents maintain that the tax is vital in preventing the concentration of wealth and promoting social mobility.
Paul Johnson, director of the Institute for Fiscal Studies think tank, said in July that there might be a case to “reform” inheritance tax by reducing the 40 per cent rate on some estates and removing some of the exemptions that allow very wealthy people to avoid the tax altogether. However, he said that abolishing it entirely would increase the “advantage” of those whose parents were “already wealthy”.
It would also make inheritance tax an election issue and put Sir Keir Starmer on the spot about whether he was prepared to make the same cuts in years to come.