Scrap IHT to make wealthy pay more tax, urges think-tank

Inheritance Tax is unfair and unpopular and should be scrapped in favour of a new ‘gift tax’, argues an influential think-tank.

The Institute for Public Policy Research (IPPR) claims inheritance tax (IHT) is too easy to sidestep for the wealthy and estates are rarely charged at the IHT rate of 40%.

This top rate of IHT is charged on the value of any estate exceeding £325,000, but the IPPR claims the 40% rate is misleading and argues that an estate of £1 million does not pay £400,000 IHT at 40% but £270,000 at 27%.

This is best shown by calculating the example:

Value of estate =                                 £1 million

Less tax-free amount =                       £325,000

Total amount chargeable to IHT =      £675,000

Tax on chargeable amount at 40% =   £270,000

The IPPR argues a capital tax on cash and non-cash gifts exceeding £150,000 between individuals would be fairer and more effective, especially if the gift was taxed in rate bands that meant wealthier individuals paid a higher rate of tax than others.

The proposed rates are 20% on gifts between £150,000 and £300,000; 30% on gifts between £300,000 and £450,000, and 40% for gifts above £450,000.

That would mean the tax on a £1 million estate would work out at £400,000 rather than the current £270,000.

“IHT raises only £2.2 billion from a dwindling number of estates,” says Nick Pearce, director of the IPPR.

“It is also highly unpopular, despite best attempts to defend it. There is no political prospect of radically increasing its scope and revenue, so it is time to give up on it.

“The proceeds of a switch from IHT to a capital receipts tax could be used to fund an expansion of free nursery education, a key driver of social mobility; this would be the best way of passing on opportunity, not privilege, from one generation to the next.”

He added that the IPPR expected the proposal to raise an extra £1 billion a year in taxes.