Inheritance tax is “arbitrary, distortionary and expensive to administer” and should be scrapped says a recently published paper from the Institute of Economic Affairs (IEA) because of the heavy burden it places on families alongside a discouragement of savings and investments.
A Taxing Inheritance outlines how the UK’s IHT regime places it fifth highest for taxation in the Organisation for Economic Co-operation and Development (OECD); a global policy forum that promotes policies to improve the economic and social well-being of people around the world. Research found that although the headline rate of 40% sits “moderately” above the OECD median almost half of OECD members, 18 out of 38, levy no tax on transfers from parents to their own children, and a further 10 charge preferential rates.
Author of the report, Rory Meakin, described the current regime as “arbitrary, complex, distortionary”, arguing it drives away the entrepreneurs Britain needs. Income tax, for example, generates 37 times the revenue of IHT, with the cost of collection disproportionate said Meakin. Collecting the tax costs £66million, but the full cost will be much higher when accounting for the high-quality professional time that could be deployed far more productively elsewhere, and the distortionary economic decision making it leads to said Meakin.
Although the paper calls for abolition, accepting the value to the treasury, a range of alternative “lighter” reform options are proffered by the think tank.
As has been widely reported, the current freeze on the nil rate band, unchanged since 2009, has seen more estates tip over into IHT liability, driven in some measure by house price growth. Raising the nil rate band significantly, to £2m or beyond, would remove the overwhelming majority of estates from liability altogether. In 2022-23, 27,920 of the 31,500 estates that paid inheritance tax had a net value below £2 million. A higher threshold would also allow the abolition of the complex residential nil rate band and the transferable allowance between spouses, delivering real simplification alongside the tax cut. A cut in the headline rate from 40% to 20% would achieve a similar outcome argues Meakin. There burden on the estate would be reduced and could be considered broadly fiscally equivalent to raising the nil rate band to £2m, while reducing the incentive to engage in avoidance.
Alternatively Meakin suggests simplifying the gifting rules would cost the exchequer relatively little. Reducing the period after which lifetime gifts become exempt from seven years to four, three or even two years would meaningfully cut the record-keeping burden on ordinary families, with only negligible effect on receipts. Although the change didn’t materialise, there was widespread conjecture the Chancellor could cap lifetime gifting, or amend the current seven year taper rate before the much-discussed Autumn budget.
Meakin challenges the perception of IHT as a “double whammy” i.e. assets and wealth are taxed both at the point of acquisition and at the point they are passed on. He suggests most purchases involve a double tax element, citing a Office of Tax Simplification review in 2018 which stated:
“a common question is why tax should be paid on wealth generated over peoples’ life time when this wealth would have already been subject to, for example, Income Tax’. The Office of Tax Simplification was not impressed: ‘this arrangement is not exceptional. Indirect taxation, such as Value Added Tax (VAT), could also be considered “double” taxation. An individual’s earnings are taxed, and then the purchasing of goods and services may also be subject to tax.”
Instead, said Meakin, “the correct lens to consider the question is the value chain from creation to consumption; inheritance tax somewhat arbitrarily introduces an additional point of taxation into the chain. T he only way to make an inheritance tax neutral would be to implement a retrospective matching tax rebate for taxed income originally received by the benefactor.”
Commenting on the paper, Anna Warren, Tax Director at wealth management firm Bentley Reid, said:
“IHT is the most hated tax by those who pay it, but it is essentially a ‘wealth tax’ and so it is seen by others as redistributing wealth. I think scrapping altogether is unlikely to happen, but some of the suggestions would be welcome options. The nil-rate band for example has not been increased since 2009, this means that huge swaths of estates that previously wouldn’t have been in the IHT net, have found themselves so in recent years.
“I certainly agree that a change in policy, with an increased nil-rate band and lower rate, would change behaviour that should ultimate benefit the economy.”
James Ward, Partner and Head of Private Client at Kingsley Napley, takes the view IHT in its current form is “the devil we know”:
“This is not the first time there has been a call abolish IHT. We know it is an unpopular tax because our latest YouGov poll published in October last year showed 54%, over half of the British public, want a complete abolition of Inheritance Tax (IHT), up from 49% in 2024. Yes I agree IHT is “arbitrary, distortionary and expensive to administer”. Some families also do serious planning to mitigate its effects.
“However the chances of the Treasury reforming this are close to zero in my view. Whilst IHT is not a huge money spinner for the taxpayer, with an increasing number of estates being hit by unreformed IHT thresholds, the tax take is growing year on year and every little counts considering the dire state of the public finances.
“The reality is that IHT is our wealth tax in this country and in many ways better the devil you know. If inheritance tax disappears, be careful what you wish for. Given the widening gap between the “haves and have nots” the alternative could be far worse.”
Concluding, Lord Frost, Director General of the IEA said:
“A nation serious about growth and about giving families the freedom to build something lasting, would not levy a 40% charge on wealth that has already been taxed. Nearly half of OECD countries do not tax what parents leave their children at all. Inheritance tax raises relatively little, costs a great deal to administer, and distorts the decisions of exactly the kind of wealth creators and entrepreneurs we are desperate to attract and retain. A government looking to boost growth, support families and simplify the tax system for fairness and economic competitiveness should consider abolishing inheritance tax.”
