Image: Wikimedia Commons
Image: Wikimedia Commons

Unpopular, ineffective and unfair: why inheritance tax should be replaced

It’s rare to find a tax as controversial in the developed world as inheritance tax. Unpopular with political parties and the public alike, it’s been rated as the U.K.’s least fair tax, with a net rating of -37, staggering compared to a highly regressive tax like VAT with a rating of +1. As such, it may seem surprising that inheritance taxes on average produce just 0.5% of national revenue for OECD countries and the U.K., where Reform U.K. and several factions within the Conservative Party have pledged to abolish the tax, still sees around 60% of wealth inherited. This may just sound like a statistic clawed out of the ONS, but it has real implications for inequality where already the wealthiest 10% of households own 40% of all wealth, with that being pre-Covid as well. As such, I’d always considered inheritance tax, as the U.K.’s sole wealth tax, as essential to preventing the breakdown of class mobility and promoting an equal society. Not only is greater fairness a just vision for a nation, but it’s often argued that equitable countries are more prosperous. This is down to individuals on a lower income having a higher tendency to spend additional disposable income while those on high incomes preserve their wealth in properties and invest in established companies. So, why have I changed my mind on inheritance tax?

it’s a tax on middle-class savings rather than super-rich wealth

The main reason is probably why it is also rated as such an unpopular tax: it’s a tax on middle-class savings rather than super-rich wealth. There are a number of causal loopholes and exemptions that have led to this development. Firstly, gifts made seven or more years before the individual’s death don’t apply to the tax, which many easily avoid. Moreover, the wealthiest, often tied up with tax havens, find themselves able to substantially limit the amount of tax they are required to pay.

Agricultural land and some business properties can provide space for yet more avoidance when it comes to exemptions. Some of Britain’s most wealthy individuals receive monumental tax reliefs for inheritance tax, above the threshold of almost £1 million for couples, which amounts to well over £600 million each year. Overall, the reliefs granted by the government was worth around £1 billion, which would pay for 26,000 NHS nurses, a staggering figure when reflecting on the state of the NHS after ten years of insufficient funding increases and the Covid-19 backlog to overcome. Due to the scale of these reliefs and the ease with which the tax can be avoided, we see the wealthiest estates, those worth over £10 million, pay an effective rate of around 10%, half of what estates worth between £2 million and £3 million pay and far below the intended rate of 40%.

It has to be fair and progressive whilst raising the revenue to fund essential public services and ensuring opportunity for all

This should highlight the serious need for reform for taxing inheritances. It has to be fair and progressive whilst raising the revenue to fund essential public services and ensuring opportunity for all. As such, several organisations and think tanks, including the IPPR, have said it should be replaced with a lifetime gift tax. Instead of taxing the inheritance of an individual’s estate after their death, this new system would impose a tax on gifts received by someone above an allowance of £125,000 over a lifetime. The tax would then be levied in the same way and at the same levels as income derived from labour. Not only is this fairer, by removing the exemptions for the richest and not valuing wealth over work, but it is also expected to yield a bonus for the Treasury. A report from the Resolution Foundation has said that the tax would bring in around £15 billion, almost 160% more than the current inheritance tax system, which could pay for a substantial post-Covid pay rise for health and social care workers, provide greater resources for stretched public services or even a cut to VAT of up to 2.5%.

 

The point of inheritance tax is to balance the tax code and ensure that wealth is taken into account as well as income and spending. Such wealth taxation is needed to protect society and prevent an established elite and underclass from developing. The chief reason for replacing inheritance tax is that it simply isn’t effective at this job and, by being ineffective, makes itself more unpopular. However, faith and support for the U.K. tax system is vital for building consensus around its duty, and abolishing inheritance tax with a suitable replacement can go a long way towards restoring it.

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