Prime minister David Cameron recently promised to raise the inheritance tax (IHT) threshold to £1m in the next parliament. The debate has been given fresh impetus by a report from the Institute of Fiscal Studies’ (IFS) think tank, which described IHT as “ineffective and unpopular”.
As the report notes, the coalition government has frozen the IHT allowance until 2017-2018. If this remains in place, nearly 10% of households will be liable for IHT by 2018, from 2.6% in 2009.
The report’s authors, Stuart Adam and Carl Emmerson, also note that scrapping IHT would be no more costly than raising the allowance to £1m.
“Of course we should abolish inheritance tax,” says Tim Worstall on the Adam Smith Institute blog. While “the tax hits the estates of those who have worked, saved and been successful”, the exemptions available mean it “doesn’t hit the estates of those dynastically rich”.
Instead, it takes from the bourgeois, leaves “the Duke alone, and still does nothing for those” born poor. Even a high-tax nation like Sweden has abolished IHT.
However, Adam and Emerson argue that as well as scrapping IHT, there is “a case for moving in a different direction”.
They point out that as “individuals do not control whether or not they are born to wealthy parents”, it “might be seen as unfair that some are able to inherit much more than others”.
So, they suggest “taxing what each recipient gets, rather than what each donor passes on” so that individuals would effectively pay income tax on their inherited wealth (something also suggested by our editor-in-chief Merryn Somerset Webb).
In any case, as Richard Dyson notes in The Daily Telegraph, “the Tories have a history of promising IHT breaks which subsequently fail to materialise”. As far back as November 1996, then-chancellor Ken Clarke claimed the government wanted to abolish the tax.