Reform should pledge to totally abolish inheritance tax

One policy that Reform and the Growth Commission agree on, is the abolition of inheritance tax (IHT), although Reform doesn’t want to abolish it completely but simply increase the threshold to £2m and lower the tax rate to 20pc.

The Growth Commission is proposing abolishing IHT because they calculate that this would have the greatest effect on GDP growth along with cutting corporation tax (something that Reform also proposes.)

Based on the most recent breakdown of IHT payments from HMRC, Reform’s raised threshold would have excluded all but 3,000 families from IHT in 2020/21 and would have raised only £1.5bn.

Having a whole section in the UK tax code to tax 3,000 people and force thousands more to invest in complicated tax planning or leave the country, will only benefit tax accountants and travel agents. 

It would be better for Reform to follow the Growth Commission’s plan and abolish IHT entirely, thereby reducing the tax code by thousands of pages and allowing HMRC to deploy its IHT personnel to other pursuits. 

After all, it is not as if the UK only has 3,000 people worth more than £2m, most of the UK’s very wealthy families transferred their assets into family trusts many years ago, while most of the merely wealthy are in the process of leaving the country if they haven’t left already. 

The Growth Commission quotes a Bloomberg report claiming that 1,400 millionaires are leaving the UK each year.

The 3,000 people Reform would be taxing are simply the ones who didn’t legally protect their relatives from IHT, possibly because they died unexpectedly at a relatively young age.

The OBR and the Treasury claim that tax cuts are inflationary, encouraging people to spend more, and while this may be true of income tax cuts for PAYE employees, it isn’t true for tax cuts that increase investment. 

For example, another Reform tax proposal, to move the income tax-free threshold from £12,570 to £20,000, would give full-time employed workers an extra £28.60 a week, at the very most.

Almost 30pc of UK taxpayers earned less than £20,000 a year in 2020/21, so this tax cut would give them less than £28.60 a week.

An additional £28.60 a week would be easily spent by most people. For the poorest in society, it will be spent on food and energy payments, for richer consumers it may mean an additional takeaway or a trip to the cinema, provided you can walk there – it isn’t enough money for a tank of petrol.

The Treasury is sure that such profligate spending would lead to higher prices, but I am less convinced by this argument. 

I suspect we have enough excess capacity in the economy at the moment to absorb the additional spending. The Treasury’s real fear about cutting income tax is the loss of tax revenue, Reform’s income tax proposals – moving the 20pc rate threshold to £20,000 and the 40pc rate threshold to £70,000 - would be equal to about 5pc of total revenue raised by taxes and duties.

Although when taxpayers do spend the extra cash, HMRC will get a lot of the “lost” revenue back in VAT and Excise Duty.

But abolishing inheritance tax is the opposite. The money gained by individual taxpayers would be large, but the money lost by HMRC in revenue would be tiny – inheritance tax raises less than 1pc of total tax revenue. 

Almost a quarter of the 27,000 estates that paid inheritance tax in 2020/21 fell into the £1m to £1.5m valuation, where the average inheritance tax payment was £161,000. 

For individuals that’s a lot of money. No one fritters away £161,000. This money will be invested. It may be invested in a new business or an existing business, or possibly just in a fund where other people will invest it. 

But however it happens, the additional money would increase investment or at least add to the capital base and lower the cost of capital.

Both would help UK GDP grow in future years. That is if the inherited wealth is put into the hands of individual beneficiaries. 

The opposite is true if the money is left in the hands of the Treasury. For the Treasury, the money raised from inheritance tax is chump change. 

An amount the average government department will spend without noticing. They certainly won’t invest the money wisely in businesses that will increase GDP growth in the future, unlike the legitimate beneficiaries.

The Government raised £1.027 trillion in taxes and duties in 2022/23. The £7.1 billion raised from IHT in 2022/23 made up less than 0.7pc of the total. 

The money raised under Reform’s IHT plans to retain inheritance tax but moving the threshold to £2 million and reducing the rate to 20pc would raise about 0.2pc of total UK taxes.

And unlike PAYE, inheritance tax is a relatively expensive tax to first evaluate and then collect, generally, properties have to be sold before any money gets to HMRC.

Apart from some socialist idealists who love to tax people who have worked and saved their money – we really have to question why we are still bothering with this expensive and complicated tax that is lowering investment and growth in the economy. 

The very rich seem to avoid it, even if it means moving to a country with better weather. IHT is just preventing the middle classes from accumulating wealth. Why would the Government want to discourage this?

There are many other interesting ideas in Reform’s “Contract with the People”, as there are in the Growth Commission’s Spring Growth Budget 2024. 

Both are worth reading, and both contain ideas that should be incorporated into any future UK government’s economic plans. 

One thing that everyone seems to agree on is that we need to get the UK economy growing again.