Britain’s tax debate has changed. Previously the argument was whether there would be rises in an autumn budget. Now the only question is which levies the Treasury will raise.
The shift has been a two-stage process. First, economic data made it look highly improbable that Rachel Reeves could fulfil existing spending pledges, while also sticking within her self-imposed fiscal rules, on current revenue projections. She needs money. Second, the chancellor and the prime minister stopped denying that this was the case. They have not confirmed that taxes are going up, but they no longer pretend that isn’t a reasonable expectation.
One option under consideration, as revealed by the Guardian this week, is to change the inheritance tax (IHT) regime. The range of reliefs that currently limit tax on gifts made in the years prior to death could be replaced by a lifetime cap. This would bring more high-value assets into the scope of IHT. Only a wealthy minority would be affected. The most recent HMRC data shows that fewer than 5% of deaths lead to any required payment of inheritance tax. While the headline rate is 40%, various reliefs and exemptions bring that down to an effective rate of 13%.
A common argument against most taxes is the disincentive impact they might have on investment and aspiration. That hardly applies to a levy on unearned, hereditary windfalls. In utilitarian terms, this is just the sort of pot that an enterprise‑oriented exchequer should target.
But the public does not see it that way. IHT is unpopular despite its negligible impact on most household finances. Partly that is a function of wishful thinking. Surveys show voters vastly overestimating the likelihood that they will one day inherit or bequeath an estate that is taxed. But distaste for IHT also has a deeper emotional resonance. It is deemed unfair, as a “double” taxation because estates might consist of savings accrued from earnings that were taxed earlier in a working life. This is not an exceptional case. Many items and activities fall under overlapping tax purviews, but people feel there is something particularly mean about the Treasury dipping into the finances of grieving families.
Failure to address similar reservations led the government into a storm of protest last year when very generous IHT reliefs on farmland were made slightly less generous. The damage from that furore was out of all proportion to the financial gains.
The government is right to look at raising more money from IHT, but the lessons of past battles must be learned. Myths need robust debunking, while other issues around inheritance – the instinct of parents to help children – need handling sensitively. There is a powerful argument for intergenerational fairness in a society where inheritance, especially of property, dictates life chances, dividing ever younger cohorts into landowner and tenant classes. Taxing inheritance is a modest but necessary levelling mechanism.
That case needs making well ahead of the budget. The tone of the conversation around tax may have changed, but the mechanism involved a prime minister and chancellor reluctantly conceding a reality only once it had already been widely acknowledged elsewhere. If they want their plans to gain public favour, they must rise out of that reactive, defensive crouch and make bigger arguments for a fairer tax system.
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