Inheritance tax co-design with ordinary citizens calls for higher tax on multi-million pound estates

29 October 2024
The government could raise £2.6bn a year by reforming inheritance taxes and making the system fairer, according to new proposals co-designed with ordinary citizens and published today in a report from the cross party think tank Demos, supported by the abrdn Financial Fairness Trust.

The government is reportedly considering raising additional revenues from inheritance tax in the Autumn Budget, and today’s research offers a plan, designed in collaboration with the public, to introduce new tax bands for inheritance tax and close tax breaks, raising £16bn by the end of this parliament.

In Britain's first ever co-design of inheritance tax, Demos brought together a representative panel of 27 members of the public. Over six two-hour sessions, the panel learnt about, discussed, and explained how they thought the government should reform inheritance tax without losing revenue. The deliberative method provided fair and neutral information to enable participants to reach a collective judgement on the policy proposals.

The deliberation showed wide public demand for reforms to address ‘unfairness’ in the current system, such as the fact that all estates pay the same tax rate, and that estates with lots of business assets or capital gains benefit from significant tax breaks. The public panel supported introducing rate bands for inheritance tax - as we have for income tax - with a tax rise for multi-million pound estates, and limiting the tax relief offered for estates with business assets. The public expressed they would feel more favourable towards the government if packaging these reforms as an explicit effort to make the system “fairer”.

Based on the results of these deliberative workshops with the public, alongside economic analysis and discussion with experts, Demos recommends a package of reforms to inheritance tax to ‘make inheritance tax fairer’ while balancing revenue gain and administrative feasibility:

● An inheritance tax cut for estates under £1m - from 40% to 30% - to limit the tax burden on ‘working people’.

● An increase in the rate for estates over £2m, from 40% to 45%, to raise revenue

● The removal of the nil-rate band (minimum tax-free allowance) for estates over £2m, in the same way as is done for the residence nil-rate band (the additional allowance available for homeowners passing on to children), to raise revenue

● The capping of tax relief for businesses, so that only the first £500,000 of business assets are tax-free. This protects local businesses while ensuring larger businesses pay their fair share

● The removal of the 'uplift' in capital gains tax (which currently means that, when assets are inherited, all the capital gains accrued before death are forgotten, and do not count towards capital gains tax). Ending the 'uplift' raises significant revenue while removing the tax incentive for people to hold on to assets until death, which can be inefficient and against what people would otherwise want to do.

Polling conducted in September 2024 confirms that the wider public support the reforms. The public are almost twice as likely to support the reformed inheritance tax system than the current system (51% vs 28%) - with higher levels of support for the reformed system among voters of all parties. Thinking about the government’s efforts to fill the £22bn ‘fiscal hole’, the public were significantly more likely to think the government should prioritise the inheritance tax reforms (60%) over spending cuts or borrowing worth an equivalent amount (9% and 11% respectively). The poll also showed that, if the government explained in the Budget that they are overhauling inheritance tax to make it ‘fairer for working people’, the government would receive a net boost in favourability of four percentage points.

Ahead of next week's Autumn Budget, it has been widely reported that Rachel Reeves is considering changes to IHT in a bid to fill the £22bn ‘fiscal hole’. Today, Demos is urging the Chancellor to stay the course, with its research showing that a package of IHT reforms worth £2.6bn per year - or around £16bn over this parliament - would align with the public’s values and be popular with voters of all political parties.   

Dan Goss, Senior Researcher at Demos and author of Plugging the Black Hole, said: 

“Ahead of the Autumn Budget, the government is challenged with raising significant revenue in a way the British public deem fair. The inheritance tax reforms in this report could net the Treasury £16bn over this Parliament, and crucially have been designed to make the system fairer in the eyes of the public."

“The public wants the government to be bold on inheritance taxation. The ball is now firmly in the court of policy makers to take these ideas forward.” 

Mubin Haq, CEO of abrdn Financial Fairness Trust, said:

“As the Chancellor seeks ways to plug the fiscal black hole without increasing taxation on working people, now is the time to reform inheritance tax. The wealthiest make use of numerous incentives to significantly reduce the amount of inheritance tax paid. The public want to see radical changes which deliver greater fairness. This includes moving from a flat-rate system to one where the wealthiest estates pay a higher rate. This change together with reforms which close loopholes would be popular - with six times as many favouring the proposed changes to inheritance tax rather than spending cuts.” 

Liam Byrne MP, author of The Inequality of Wealth: Why it Matters and How to Fix it, said: 

"Britain’s tax system simply isn’t fair. We need a tax code that reflects moral code and that means the very richest in our society who have enjoyed multimillion pound windfall gains from low interest rates, need to pay a little more. These innovative ideas from Demos show how reform might work for inheritance tax, providing a welcome tax break for the lion's share of Britain's families with some common sense tax rises for the very richest. The plan deserves detailed scrutiny at HM Treasury."

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