Scrapping inheritance tax would benefit the wealthiest - here's how

Rishi Sunak could scrap inheritance tax in an effort to woo voters before next year's general election.

The PM is reported to be considering making the decision in three months, according to The Telegraph, in a move designed to create a clear gap between the Conservatives and Labour.

Abolishing the controversial tax is seen as a vote-winner by the PM, and would help to appease Tory MPs who have branded it as "immoral" in past. Labour has vowed to keep it in place with shadow chancellor Rachel Reeves saying in November that cutting inheritance tax would not “be the right priority” and cutting other taxes would be what she would do if it was “affordable”.

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What is inheritance tax?

Inheritance tax is paid on a person's estate – their property, money and possessions – when they die.

The standard inheritance tax rate is 40% and is only charged on the part of an estate that’s above the £325,000 threshold. In addition, there is normally no inheritance tax to pay if someone leaves everything above the £325,000 threshold to their spouse, civil partner, a charity or a community amateur sports club.

That threshold can rise to £500,000 if a home is given to a child or grandchild. There is a further possible exemption that also allows married people or those in civil partnerships to potentially leave £1m tax free because the deceased person's allowance can "pass on" to their partner.

The standard inheritance tax rate is 40%. Very few people (about one in 25) actually pay the tax due to the high threshold and exemptions, with the government saying the levy raises more than £7bn a year.

A more comprehensive overview can be found on the government website.

Who will benefit most from scrapping inheritance tax?

Exemption thresholds mean that the share of deaths resulting in inheritance tax is small at around 4% in 2020–21, which means around 96% of people would be unaffected if it were scrapped by Sunak.

So who are the remaining 4%? According to a report released by the Institute of Fiscal Studies (IFS) in September, those most likely to benefit from any scrapping of the tax would likely be the wealthiest in the country.

The report says: "Around half (47%) of the benefit would go to those with estates of £2.1m or more at death, who make up the top 1% of estates and would benefit from an average tax cut of around £1.1m. The 90% or so of estates not paying inheritance tax would not be directly affected by such a reform."

The IFS, which predicts the proportion of deaths resulting in inheritance tax could grow to more than 7% (and a tax take of £15bn) by 2032–33, also pointed out that there is "near-universal agreement that inheritance tax in its current form needs reform".

David Sturrock, a senior research economist at IFS, said in September the numbers revealed "reasonable arguments for and against an inheritance tax", adding: "As inheritances grow in size, it is increasingly important that we address problems in the current system.

"The government should abolish the special treatment given to business assets, certain types of shares, agricultural assets, pensions and homes passed to direct descendants. These exemptions and reliefs open up channels to avoid inheritance tax. This is costly, unfair and distorts economic decisions. Reforming them could raise as much as £4.5bn in additional revenue."

In September - the last time Sunak was reported to be considering cutting inheritance tax ahead of the autumn statement - defence secretary Grant Shapps described it as being "deeply unfair" and "punitive". "I think it’s a question, for many people, of aspiration, and people know that there’s something deeply unfair about being taxed all their lives and then being taxed in death as well," he told Sky News.

Sources told the Telegraph that Sunak has demanded a "gear change" on tax ahead of an election, and is also considering increasing the threshold at which people start paying the 40% rate of income tax and reducing the basic 20% rate, in an effort to win votes more widely.

Director of welfare at the Nuffield Foundation, Mark Franks, said that "practical reforms" would have more of an impact on the economy than abolishing inheritance tax altogether. He said: "Like all taxes, it supports vital public services. Abolishing it or scaling it back would mean either cutting such services, raising other taxes or increasing the national debt.

"Yet, the current design of inheritance tax compromises both confidence in it and its ability to generate revenue effectively. Through practical reforms, it is possible to craft a more just and efficient system."

What do voters think?

The majority of voters are against the tax, a rolling poll by YouGov reveals. In October, 54% of voters said they considered the tax to be either very unfair or unfair, with just 5% saying it was "very fair", and 15% considering it fair.

When asking voters why they viewed the tax as unfair, YouGov found that by far the most common reason is the perception that it "represents ‘double taxation’ – that the deceased had already paid various taxes when they earned their money and purchased their property, and were now effectively being forced to do so again in order to pass it on".

More than four in 10 of those who consider inheritance tax unfair gave this as a reason (42%). In a distant second place (at 17%) was a general rejection of the principle, with respondents simply saying that the government shouldn’t tax inheritance.

Watch: What is inheritance tax?