Inheritance tax (IHT) remains one of the most contentious taxes in the UK, sparking debate over whether it should be scrapped entirely. IHT levies a 40% tax on estates valued above the nil-rate band of £325,000 per individual or £650,000 per married couple. Assets passed on after death get taxed above this exclusion. Let’s take an in-depth look at how inheritance tax works now, the case for abolishing it, potential risks, and research on the impacts.
Overview of How Inheritance Tax Currently Works
Inheritance tax applies to the portion of an estate that exceeds the nil-rate band of £325,000 when assets get passed on after the owner’s death. All value above that threshold gets taxed at 40% as it is transferred to heirs and beneficiaries. However, transfers to spouses and civil partners are exempt from IHT in the UK.
Gifts made more than 7 years before the death are also exempt, along with certain gifts made specifically to charities or political parties. These exemptions and the nil-rate band help limit IHT liability for many estates. But larger estates can still incur substantial IHT bills.
Inheritance tax raised around £5.3 billion for the UK government in 2021-2022. It remains a significant source of tax revenue.
Arguments in Favor of Scrapping Inheritance Tax
Several main arguments emerge in favor of eliminating inheritance tax:
- Penalizes savings & investment – Critics contend IHT punishes prudent savings and investing by taxing assets twice – first when earned as income and again when transferred after death. This discourages wealth creation.
- Complex & costly administration – Complying with IHT rules can be complicated for executors of large estates. Complexity leads to high administrative and accounting costs.
- Right to transfer assets – People should have the ability to freely pass on assets they acquired and paid taxes on already during their lifetime.
- Spur growth incentives – Abolishing IHT could incentivize more long-term investing and saving, providing an economic growth boost.
Potential Risks of Removing Inheritance Tax
Meanwhile, opponents of repealing IHT point to several potential risks:
- Lost revenue – IHT currently contributes around £5 billion annually to UK tax receipts. Government would lose this revenue stream if the tax gets eliminated.
- Increased inequality – With no IHT, wealth could concentrate heavily among the top ultra-high net worth families over generations.
- Reduced charitable giving – IHT exemptions for gifts to charities currently encourage more donations. Charities could lose out with no IHT.
- Savings disincentives – Removing IHT reduces disincentives to accumulate excessive wealth solely for inheritance purposes.
Assessing the Overall Impact
Overall research and projections on the impacts of scrapping IHT reveal a complex mix of potential outcomes:
- Wealth inequality could rise significantly according to the Resolution Foundation. The top 10% may control 65% of wealth by 2050 without IHT.
- Cebr estimates eliminating IHT could create 50,000 jobs and add £20 billion to the economy over 10 years by boosting savings and investment.
- Government would need to find around £7 billion per year in revenue from other sources. Difficult trade-offs around taxes and spending would ensue.
On balance, the decision around IHT remains challenging. A balanced approach would require mitigating any negative consequences from removing this longstanding tax.
