IHT should be paid by individuals NOT estates, think tank says

The current inheritance tax system should be ‘ripped up’ and replaced with a new one that levies tax on individual heirs, not estates, says an influential Left-wing think-tank.

The plan – proposed by the Resolution Foundation, one of the Chancellor’s favourite think-tanks – is likely to mean far more people would be forced to pay the hated tax. 

But it may prove attractive to Reeves as she puts the finishing touches on her maiden Budget in ten days’ time.

Reeves wants to raise up to £50 billion – double the sum previously thought – to spend on public services such as the NHS.

She has ruled out direct tax increases on ‘working people’, but left the door open to higher wealth taxes on inheritance, capital gains and pensions that would also hit the middle classes.

Speculation is rising that Labour is laying the ground for a big overhaul of inheritance tax in the Budget. IHT is currently levied on the value of someone’s estate – the assets they leave – when they die.

The first £325,000 is tax-free, after which an estate is potentially liable to a flat-rate of 40 per cent, which is taken off before the assets are distributed.

The threshold can increase to £500,000 if you give your home to your children or grandchildren. And there is no IHT to pay if you leave your estate to your spouse or civil partner, meaning in some cases estates of up to £1million are not liable for tax.

Just one in 25 grieving families pay IHT, but receipts are rising as more property wealth is passed on as house prices rise.

IHT raised £7.5 billion in the last tax year. Estimates seen by The Mail on Sunday suggest that could nearly double under the Resolution Foundation’s plans.

The Left-wing think-tank wants to swap the tax on a dead person’s estate with a levy on heirs who receive a legacy.

The foundation issued a paper on the subject in 2023 and last week affirmed it is ‘very much’ still its policy.

Proposals would axe seven-year rule  

The proposed tax would not be limited to transfers made less than seven years before death, as it is now, but could be slapped on gifts made at any time.

The tax could also see business and agricultural reliefs axed or curbed – and bring pension pots within IHT for the first time. ‘We are still very much in favour of scrapping IHT and moving to a lifetime tax on recipients,’ said Molly Broome, an economist at the think-tank.

Its former chief executive Torsten Bell is now a Labour MP and rising star in the party.

He presided over the think-tank’s previous modelling of how a recipient-based wealth tax would raise an extra £4.8 billion a year. Its main features included:

• A lifetime tax-free allowance of £125,000
• A basic rate of 20 per cent tax on receipts up to £500,000 
• A 30 per cent tax on receipts of more than £500,000
• An annual gift allowance of £3,000 

A similar methodology suggests £6 billion on top of existing revenues from IHT could be raked in during this tax year.

Reeves is also looking at extending to ten years the ‘seven year rule’ where assets given away are exempt if the person lives at least that long afterwards.

In a book she published in 2018 the Chancellor said IHT needed to be reset or ‘shifted wholesale’ to a tax on recipients of gifts throughout a lifetime.

IHT is one of Britain’s most hated taxes, not least because it is paid in the immediate aftermath of bereavement. Critics also say it punishes the prudent, who have saved throughout their lives, adding it is ‘anti-aspirational’.

The foundation claims that the tax system ‘badly needs to respond’ to the way increases in housing wealth and other assets have created ‘winners and losers’ based on luck such as ‘being born to the right parents’.

‘It may well be worth ripping up existing IHT legislation and starting again with a new system that delivers all of these desirable changes at once and is fit for the coming decades and the increased flow of inheritances they will bring,’ it concludes.

Most advanced economies already tax those who receive an inheritance, rather than the estate, and as a result take more money from their citizens.

France, for example, raises twice as much from this type of wealth tax than the UK.

A Treasury spokesman said: ‘We do not comment on speculation around tax changes outside of fiscal events.’