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Abolishing inheritance tax would hand a £1mn tax cut on average to the richest 1 per cent of UK estates, according to a leading think-tank.
Prime minister Rishi Sunak is exploring widespread reforms to the inheritance tax system, including cutting the 40 per cent headline rate and scrapping the levy altogether.
Ministers are considering the proposals as the Conservative party seeks to attract voters and strengthen its standing ahead of the general election expected next year.
However, chancellor Jeremy Hunt is not expected to make a final decision on the policy until 2024.
The Institute for Fiscal Studies said in a report on Wednesday that scrapping the levy would cost the Treasury about £7bn a year and disproportionately favour wealthier households.
“There are reasonable arguments for and against an inheritance tax. But as inheritances grow in size, it’s increasingly important that we address problems in the current system,” said David Sturrock, IFS senior research economist.
The report found that 47 per cent of the benefit of abolishing inheritance tax altogether would go to estates worth £2.1mn or more — representing 1 per cent of the total number of estates — after a person’s death. Properties this size would receive an average tax cut of about £1.1mn.
Abolishing the levy would dent the Treasury’s future revenue from the tax, the think-tank warned.
At its current level, the tax would raise £10.3bn in today’s prices by 2027-28 — more than the £8.2bn estimated by the Office for Budget Responsibility, the fiscal watchdog, according to the report.
The IFS said the OBR had underestimated projected inheritance revenues because it had failed to take into account the increased wealth of future generations at death compared with today.
The report noted that if inheritance tax was retained in its current form it would raise £15.3bn by 2032-33.
Currently, less than 4 per cent of estates pay inheritance tax on their owner’s death. The IFS forecast this would rise to more than 7 per cent by 2032-33.
It predicted that one in eight people — 12 per cent of the population — will have inheritance tax due on either their or their spouse or civil partner’s death by 2032-33. In London, the number will rise to 23 per cent.
The report also found that inheritance tax only had a “small impact on the distribution of inheritances received and therefore on intergenerational wealth mobility”.
The wealthiest fifth of parents to die in the next year will bequeath an average of £380,000 per child, and their estates will pay inheritance tax of about 10 per cent of this amount, the report estimated. In contrast, the least wealthy fifth of parents will leave less than £2,000 per child.
The report set out specific recommendations to improve the inheritance tax system, which suffered from “a number of problems, each leading to different forms of unfairness and inefficiency”.
It called for the abolition of certain exemptions and reliefs such as “the special treatment” given to business assets, certain types of shares, agricultural assets, pensions and homes passed to direct descendants.
Sturrock said: “These exemptions and reliefs open up channels to avoid inheritance tax. This is costly, unfair and distorts economic decisions. Reforming them could raise as much as £4.5bn in additional revenue.”
Letter in response to this report:
Reduce inheritance tax and more high earners will stay in UK / From Richard Ross, Chairman, Rosetrees, London HA8, UK
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