A study conducted by the Institute for Fiscal Studies has found that potential cuts on inheritance tax in the UK could disproportionately benefit the country’s wealthiest 1%. The report suggests that if the tax were abolished, half of the benefits would go to estates valued at £2.1 million or more, representing the top 1% of all estates. However, this move would exacerbate inequalities in the UK, as wealth inequalities already exist before inheritances are received. The authors argue that with the growing importance of inheritance as a lifetime economic resource, parental wealth is set to be a greater driver of lifetime income across younger generations.
The proposed inheritance tax changes by Prime Minister Rishi Sunak’s Conservative Party are seen as a way to boost support ahead of the next general elections. Many of Britain’s richest people have estates in constituencies held by Conservative members of parliament, so an overhaul of inheritance tax could garner more votes for the party. However, the inheritance tax has been divisive in the UK, with critics arguing that it is unfair and easy to avoid. Currently, the tax is only applied to under 4% of deaths in the country, but revenues are expected to double in the next 10 years to over £15 billion. The government emphasizes the significance of this revenue for funding public services.
The potential cut or abolition of the inheritance tax comes amidst persistently high inflation and high-interest rates, which have put pressure on public finances and government debt. The current inheritance tax regime, introduced in 1986, was meant to redistribute wealth in society. However, it has been criticized for being easy to circumvent. The Institute for Fiscal Studies suggests that reforms, such as placing caps on certain reliefs, could create a robust source of revenue for the government, raising up to £4.5 billion. These funds could then be directed towards public programs or tax cuts in other areas.