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Abolishing inheritance tax would boost workforce by 300,000, say Truss-backed economists

Jeremy Hunt will deliver the spring Budget on March 6
Jeremy Hunt will deliver the spring Budget on March 6 - Kirsty O’Connor/HM Treasury

Abolishing inheritance tax would increase Britain’s workforce by 300,000 because it would encourage people not to retire early, economists backed by Liz Truss have argued.

Analysis by the Growth Commission claimed the number of people in work would increase by 1.1 per cent if the tax was removed.

The commission’s economists argued that people choose to stop work earlier because the top tranche of their savings will be taxed when they die, but may not do so if the tax was scrapped.

Meanwhile, a second Tory-linked group, the Adam Smith Institute, headed by Nadhim Zahawi, the former Conservative chairman, also published a call to axe the tax.

The institute produced a paper, shared with The Telegraph, that found the number of inheritance tax forms that must be filled out has increased five-fold since the 1990s.

The calls for the abolition of inheritance tax, an issue on which The Telegraph has campaigned, comes with the Budget, to be delivered by Jeremy Hunt, the Chancellor, little more than a week away.

Sources at Number 10 and Number 11 have indicated that an inheritance tax cut will not be considered despite the Government weighing up the move for months.

Tory strategists concluded that a reduction in inheritance tax could be perceived by some voters as a sign that the party was trying to help its supporters in what may be its final months in office.

Inheritance tax is paid on death if an individual’s estate is worth more than £325,000, though special rules increase that amount if a family home is passed to family members.

Around four per cent of estates are hit by the tax, although polling suggests many more voters do not like it and regard it as double taxation.

The Growth Commission, a group of economists endorsed by Ms Truss after she was forced out of Number 10, has claimed axing it would increase GDP per capita – which has been falling for most quarters in the last two years – by 1.4 per cent by 2044 and concluded that some 4,300 of the richest taxpayers could remain in the UK as a result.

Douglas McWilliams, the co-chairman of the commission, said: “Before we ran the analysis, I was not convinced that abolishing inheritance tax was a good idea. But the research is pretty persuasive, showing that the tax has bad effects on savings, which leads to an exodus of high taxpayers and encourages early retirement.

“With an ageing population, and with so many other countries with low or zero rates of inheritance tax, keeping this tax for purely ideological reasons looks to be a luxury the UK cannot afford. It’s not even as if the very rich actually pay the tax – they either go abroad or tie up their assets in trusts.”

The ASI paper found that inheritance tax accounts for a smaller proportion of overall tax take than three decades ago, dropping from 1.7 per cent then to 0.89 per cent now.

The statistic was used to argue that there would be less of an impact to the Treasury’s finances if the tax were scrapped now than there would have been in the 1990s.

The ASI also noted that death duties were abolished in Australia, Canada and much of East Asia and the Pacific in the 1990s. Austria, Portugal, Sweden and Norway have abolished inheritance taxes and death duties since 2003.

Mr Zahawi said: “Conservatives have long understood that the continued existence of inheritance tax is fundamentally antithetical to our instincts.

“The Government has the opportunity in the spring Budget to demonstrate our Conservative values, that we understand that individuals know best what to do with their own money and that we are on the side of family-run businesses. One of the most effective ways to do so would be to abolish the immoral death tax.”