Written by James Ward, head of private client at Kingsley Napley
The Telegraph is running a campaign for the abolition of inheritance tax, supported by Liz Truss and reportedly some 50 other Tory MPs.
IHT, they argue, is immoral, iniquitous and complex, negatively impacting families and our economy, all for a small proportion of total tax revenues. As such the Conservatives must make abolition a priority to win the next election.
Now there is no doubt that inheritance tax is one of the most hated taxes (along with Stamp Duty) with almost all our clients (and their children) wanting to mitigate their exposure to it but what is the Tories’ record on this and what would the effects be if inheritance tax was no more.
The Conservatives have done very little to tamper with the IHT regime. In fact by freezing the nil rate band since 2009, more estates than ever before are paying inheritance tax. The introduction of the residence nil rate band has helped but made the inheritance tax regime very complicated to navigate. It is 16 years since George Osborne stated that each person would have a nil rate band of £1 million, a pledge only achieved halfway by the residence nil rate band in certain circumstances. So their record is not too good when thinking they may get rid of the tax.
Would the scrapping of inheritance tax really bring election success? With less than 10% of estates paying IHT and these estates mostly being in the Southeast of England and mainly owned by people already voting Conservative, it is difficult to see how this would move the electoral needle. Better for Mr Sunak to focus on Income tax and the inequality of taxation on earnings over £100,000 rather than follow through with a tax break for the perceived wealthy – people with estates over £1 million.
But let’s say they did scrap or promise to scrap IHT and still lost the next election. What would a Labour government do? They would almost certainly reinstate it, most likely without the residence nil rate band or with a higher rate. Or, conceivably, they could see the path clear for the introduction of a lifetime Wealth Tax. Something far more punishing where people actually still alive may have to pay tax on the value of their assets on a yearly basis rather than pushing it back to after their death.
No one likes inheritance tax and it would be far better were it not to exist. However the reality is that it is our wealth tax and, in the main, it is only payable on death. Before then actions can be taken to reduce the inheritance tax burden on families.
If inheritance tax disappears, be careful what you wish for. Given the widening gap between the “haves and have nots” the alternative could be far worse.