Break up inheritance tax system, says left-wing think tank

The current inheritance tax system should be “destroyed” and replaced with a new one that taxes individual heirs, not inheritances, says an influential left-wing think tank.

The plan – proposed by the Resolution Foundation, one of the Chancellor’s favorite think tanks – is likely to mean many more people would be forced to pay the hated tax.

But it may be appealing to Reeves as he puts the finishing touches on his first budget in ten days.

Reeves wants to raise up to £50bn – double the sum previously planned – to spend on public services such as the NHS.

He has ruled out direct tax increases on “workers” but left the door open to higher taxes on wealth, inheritances, capital gains and pensions that would also affect the middle classes.

Speculation is growing that Labor is laying the groundwork for a major inheritance tax overhaul in the Budget. Currently, IHT is applied to the value of a person’s estate (the assets they leave behind) when they die.

The first £325,000 is tax-free, after which the estate is potentially subject to a flat rate of 40 per cent, which is deducted before the assets are distributed.

The threshold can increase to £500,000 if you give your home to your children or grandchildren. And there is no IHT to pay if you leave your estate to your spouse or common-law partner, meaning that in some cases estates of up to £1 million are not subject to tax.

Only one in 25 bereaved families pay IHT, but incomes are rising as more property wealth is transferred as house prices rise.

IHT raised £7.5bn in the last financial year. Estimates seen by The Mail on Sunday suggest that figure could almost double under the Resolution Foundation’s plans.

The left-wing think tank wants to replace the tax on a deceased person’s estate with a levy on heirs who receive a legacy.

The foundation published a document on the issue in 2023 and last week said it remains “very much” its policy.

The proposed tax would not be limited to transfers made less than seven years before death, as is now the case, but could apply to gifts made at any time.

The tax could also see business and farming allowances removed or limited, and pension funds hit IHT for the first time. “We are still very much in favor of scrapping IHT and moving to a lifetime tax for beneficiaries,” said Molly Broome, an economist at the think tank.

Its former chief executive, Torsten Bell, is now a Labor MP and a rising star in the party.

He chaired the think tank’s earlier modeling of how a beneficiary-based wealth tax would raise an extra £4.8bn a year. Its main features included:

• A tax-free lifetime allowance of £125,000
• A basic rate of 20 per cent tax on receipts of up to £500,000
• A 30 per cent tax on income over £500,000.
• An annual gift allowance of £3,000

A similar methodology suggests that £6 billion could be raised on top of existing IHT revenues this financial year.

Reeves is also considering extending to ten years the “seven-year rule,” under which gifted assets are exempt if the person lives at least that long afterwards.

In a book she published in 2018, the Chancellor said IHT should be restored or “wholesale transferred” to a lifetime tax on gift recipients.

IHT is one of the most hated taxes in Britain, not least because it is paid immediately after bereavement. Critics also say it punishes the prudent, who have saved throughout their lives, adding that it is “anti-aspirational.”

The foundation states that the tax system “urgently needs to respond” to the way increases in real estate wealth and other assets have created “winners and losers” based on luck, such as “being born to the right parents.”

“It may be worth dismantling the existing IHT legislation and starting over with a new system that delivers all of these desirable changes at once and is suitable for the coming decades and the increased flow of inheritances they will bring,” he concludes.

Most advanced economies already tax those who receive an inheritance, rather than wealth, and receive more money from their citizens as a result.

France, for example, collects twice as much of this type of wealth tax as the United Kingdom.

A Treasury spokesman said: “We do not comment on speculation about tax changes outside of tax events.”