Labour told to scrap ‘arbitrary’ inheritance tax system
The UK government is being urged to scrap the inheritance tax system following warnings that that it enforces the UK as a “high-tax outlier” and risks stifling investment and driving entrepreneurs abroad.
A new report from the Institute of Economic Affairs (IEA) highlights that nearly half of the 38 OECD countries – where members are primarily high-income developed economies committed to democracy and market-based economies – do not tax bequests to adult children, placing Britain among a small group of high-taxing nations for family succession.
The UK’s inheritance tax (IHT) is a 40 per cent tax levied on an estate’s value upon death, exceeding a standard threshold of £325,000. This threshold can increase to £500,000 if a main residence is passed to children.
The report from the IEA argues the tax is a “distortionary” weight on the economy, describing it as an arbitrary extra hit on a “value chain” that has already been raided by income tax, national insurance and VAT.
“A nation serious about growth and about giving families the freedom to build something lasting, would not levy a 40 per cent charge on wealth that has already been taxed,” Lord Frost, director general of the IEA, said.
“A government looking to boost growth, support families and simplify the tax system for fairness and economic competitiveness should consider abolishing inheritance tax.”
Inheritance tax ‘deadweight’ on economy
It comes as the government spent the last year battling backlash from the farming community following its contentious move to scrap tax breaks for family farms in the 2024 Autumn Budget.
The move sparked over a year of nationwide protests and eventually forced a U-turn in December last year, where the government more than doubled the tax-free threshold for agricultural assets to £2.5 million to quiet the row.
The IEA brands the tax a massive “deadweight” cost to the economy, with the government spending £66m a year just to collect it, whilst families are left to navigate red tape.
“Inheritance tax is arbitrary, complex, distortionary and drives away the entrepreneurs Britain needs,” Rory Meakin, who authored the report, said.
“A good tax system would not have an inheritance tax and, ultimately, ours should be abolished. But even a hesitant government can reform the system now. Raising the threshold, cutting the rate, simplifying the gifting rules: any of these would be a meaningful step in the right direction. “