Change tax on inheritance to raise more, says think-tank

Inheritance tax should be overhauled to raise twice as much money for the Exchequer, a leading think-tank has said as it warned revenues from the “wildly unpopular” levy are set to lag behind as record amounts of wealth are passed on in people’s wills.

The Resolution Foundation argues that the “failed” inheritance tax should be scrapped and replaced with a levy that is harder to avoid, featuring lower tax-free thresholds.

Inheritances are set to hit £200 billion by 2035-36, but the think-tank warns improving health care means millennials are not set to inherit until they reach 61 – too late to help with the costs of buying a home or raising children.

In its report – Passing on – produced for the Intergenerational Commission, the Resolution Foundation claims inheritance tax is no longer fit for purpose, collecting just 77p in every £100 raised by the Exchequer. Just 4 per cent of all UK estates are subject to inheritance tax.

Many see inheritance tax as the “least fair tax” because of the high marginal rate of 40p in the pound, and consider it a “voluntary” levy on the very wealthy, according to the report.

Adam Corlett, senior economic analyst at the foundation, said: “Inheritances are already worth over £100bn a year, and their doubling over the next 20 years means they are going to play an even larger role in shaping British society.

“But the current system of inheritance tax is not fit to deal with this societal shift. It currently manages the uniquely bad twin feat of being both wildly unpopular and raising very little revenue.”

The report suggests a switch to a Lifetime Receipts Tax, which would be applied to those receiving inheritances rather than an estate itself.

Inheritors would pay a much lower rate than currently, and only on amounts in excess of a “lifetime allowance”.

The Resolution Foundation says this approach would see inheritances spread more widely, as each individual would benefit from the taxfree allowance.

An inheritance would only be tax-free up to £125,000, with 20 per cent paid on sums up to £500,000 and 30 per cent after that. The changes would significantly reduce the marginal rate on wealth transfers while still increasing tax revenue from a projected £6bn in 2020-21 to £11bn, but more people would be brought into paying inheritance tax.

Currently, the first £325,000 from an estate is tax-free, rising to £450,000 if it includes a family home. But additional reliefs for spouses mean some estates of up to £1m are set to be tax free by the end of the decade.

The think tank argues that a Lifetime Receipts Tax would also clamp down on tax avoidance by the very rich, who are able to reduce their bills by making gifts before dying, something ordinary families with assets tied up in their home are unable to do.

Reliefs for commercial and agricultural property which currently cost the Exchequer over £1bn a year would be restricted to small family businesses and farms.

Mr Corlett added: “Rather than tweak our failed inheritance tax system, it should be scrapped altogether and replaced with a new Lifetime Receipts Tax. This new system would be fairer to families, harder to avoid and would ensure our tax system keeps up with 21st century Britain.”