Think tank calls for IHT to be scrapped

The Institute of Economic Affairs (IEA) has called for inheritance tax (IHT) to be scrapped entirely, while also setting out a list of ‘less expensive’ recommended reforms for the government to consider.

Its report, A Taxing Inheritance by Rory Meakin, described the tax as “arbitrary, distortionary, and expensive to administer”, and said it imposed heavy costs on families, deterred saving and investment, and undermined the UK’s international competitiveness.

Measured on what parents can actually leave their children, the IEA stated that the UK had the fifth highest IHT in the OECD, while 18 of 38 OECD countries had no IHT and a further 10 charged preferential rates.

The think tank noted that while the UK’s 40 per cent headline rate was only slightly above the OECD median, most countries treated wealth transfers from parents to their children as a ‘special category’, taxing them at lower rates.

It argued that IHT introduced an arbitrary additional point of taxation with no justification, and it was among the most disproportionately complex taxes in the UK system.

The paper estimated that collecting IHT cost £66m, but warned that the full cost was much higher when accounting for the professional time needed and “distortionary” economic decision making it leads to.

Furthermore, the IEA said scrapping IHT would eliminate a distortion to savings and investment on the broader economy, and the benefits of improving the UK’s competitiveness as a place for entrepreneurs and high net worth individuals (HNWI) to live and build businesses.

While the think tank urged the government to prioritise spending cuts to fund tax cuts, the paper also outlined a series of cheaper reforms that could deliver “meaningful benefits”.

Its recommendations included raising the nil rate bank to £2m or above to remove the majority of estates from liability, which would also allow the abolition of the residential nil rate band and transferable allowance between spouses.

The IEA added that reducing the headline tax rate from 40 per cent to 20 per cent would decrease the burden on all estates paying the tax and could be considered “broadly fiscally equivalent” to raising the nil rate band to £2m while reducing the incentive to engage in avoidance.

Finally, the think tank urged the government to consider simplifying the gifting rules by reducing the period after which lifetime gifts become exempt from seven years to either four, three, or two years.

“A nation serious about growth and about giving families the freedom to build something lasting, would not levy a 40 per cent charge on wealth that has already been taxed,” said IEA general director, Lord David Frost.

“Nearly half of OECD countries do not tax what parents leave their children at all. IHT 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 IHT."

Report author, Rory Meakin, added: "IHT is arbitrary, complex, distortionary and drives away the entrepreneurs Britain needs.

“A good tax system would not have an inheritance tax and, ultimately, ours should be abolished.

“But even a hesitant government can reform the system now. Raising the threshold, cutting the rate, simplifying the gifting rules: any of these would be a meaningful step in the right direction."

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