The current inheritance tax system should be ‘taken apart’ and replaced with a new system that taxes individual heirs, not estates, an influential left-wing think tank has said.
The plan – put forward by the Resolution Foundation, one of the Chancellor’s favourite think tanks – is likely to mean many more people will be forced to pay the hated tax.
But it could be attractive to Reeves when she finalises her first budget in 10 days’ time.
Reeves wants to raise up to £50bn – double the amount previously thought – to spend on public services such as the NHS.
She has ruled out direct tax increases for ‘working people’ but has left the door open to higher wealth taxes on inheritances, capital gains and pensions, which would also hit the middle class.
There is growing speculation that Labour is laying the groundwork for major inheritance tax reform in the budget. IHT is currently charged on the value of a person’s estate – the assets they leave behind – when they die.
The first £325,000 is tax-free, after which an inheritance can be subject to a flat rate of 40 per cent, which is deducted before the assets are distributed.
If you leave your home to your children or grandchildren, the threshold can rise to £500,000. And no IHT is payable if you leave your estate to your spouse or civil partner, meaning that in some cases inheritances of up to £1 million are tax-free.
Only one in 25 bereaved families pay IHT, but incomes are rising as more wealth is passed on as house prices rise.
IHT raised £7.5 billion in the last fiscal year. Estimates from The Mail on Sunday suggest this could almost double under the Resolution Foundation’s plans.
The left-wing think tank wants to replace the tax on the estate of a deceased person with a tax on heirs who receive an inheritance.
The foundation published a paper on the subject in 2023 and confirmed last week that this is still its policy ‘to a large extent’.
Proposals would eliminate the seven-year rule
The proposed tax would not be limited to transfers made less than seven years before death, as is currently the case, but could be applied to gifts made at any time.
The tax could also lead to the removal or reduction of support measures for businesses and farming – and bring pension pots under IHT for the first time. “We remain strongly in fabour of removing IHT and introducing a lifetime tax on recipients,” said Molly Broome, an economist at the thinktank.
Former CEO Torsten Bell is now a Labour MP and a rising star in the party.
He led the thinktank’s previous modelling of how a recipient-based wealth tax would raise an extra £4.8bn a year. Key features:
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 above £500,000
A £3,000 annual donation exemption
A similar methodology suggests that £6bn could be raised on top of existing IHT revenues this tax year.
Reeves is also considering extending the “seven-year rule” to 10 years, with gifted property exempt if the person lives for at least that long.
In a book she published in 2018, the Chancellor of the Exchequer said IHT should be reintroduced or “moved” to a tax on lifetime gifts.
IHT is one of the most hated taxes in Britain, not least because it is paid immediately after a death. Critics also say it punishes the wise, who have saved their whole lives, adding that it is “anti-aspirational”.
The charity argues that the tax system “urgently needs to respond” to the way in which the rise in property wealth and other assets has created “winners and losers” based on luck, such as “being born to the right parents”.
“It may be worth tearing up the existing IHT legislation and starting again with a new system that delivers all these desirable changes in one go and is fit for the coming decades and the increased flow of inheritances that this will bring,” the report concludes.
Most advanced economies tax everyone who receives an inheritance, rather than the estate, and take more money from their citizens as a result.
France, for example, collects twice as much of this kind of wealth tax as Britain.
A Treasury spokesman said: “We do not comment on speculation around tax changes outside of budgetary events.”