How many more taxes do Liz Truss’s team of ministers and advisers hope to cut? Yesterday the Guardian reported that Andrew Griffith, Truss’s City minister, wants to abolish inheritance tax (IHT). The New Statesman can report that Griffith is not alone. Matthew Sinclair, Liz Truss’s chief economic adviser in No 10 and a former chief executive of the TaxPayers’ Alliance, is an even more vociferous opponent of the tax. Sinclair’s dislike of IHT has been a recurring theme of his Twitter account since 2016.
“Inheritance Tax is [less than] 1 per cent of [government tax] revenue. Just scrap it,” he argued in April 2016. “Looking out for our family after we’re dead is the most morally profound thing most of us will ever do. Double taxing that is perverse.”
Sinclair opposes the tax philosophically because it is, in theory, levied on post-tax income (in reality, some estates may have accrued their wealth without ever paying tax, or much of it, on their family’s income). As he put it, “You earned the money [and] paid tax on it. It’s yours to dispose of as you wish. Property rights.” He also described IHT as “kicking a family while they’re down”, which “seems almost the definition of ugly”.
Inheritance tax is levied (at 40 per cent) on estates with a value greater than £325,000, or £650,000 for couples. As a consequence, only around 4 per cent of Britons pay it, and it accounts for 0.7 per cent of UK tax revenue – a relatively small sum, as Sinclair has pointed out.
But inheritance tax is, nevertheless, the most substantial form of wealth tax in the British system. And it is projected to raise £6.7bn this year, according to the Office for Budget Responsibility. That is enough to pay for most of the UK’s more than £11bn foreign aid budget (which, incidentally, many on the Tory right would like to cut).
Sinclair sees inheritance tax as both theoretically flawed and practically inconsequential, and thus ripe for scrapping. But another view would put inheritance tax in this context: the vast majority of inherited and gifted wealth is currently untaxed. Rather than scrapping IHT because it raises too little in tax, the UK could reform the way it taxes inheritance to raise considerably more revenue.
As the Resolution Foundation think tank calculated in 2018, “Inheritance Tax revenue represents an effective tax rate of only 3.5 per cent” on the £127bn in inheritances and gifts distributed (in 2015-16). There are various options for taxing more of this wealth. One option – as Nick Macpherson, the former Treasury permanent secretary, suggested to me last December – would be to introduce a flat tax of 10 or 15 per cent on the value of all estates. Another option, preferred by the Resolution Foundation, would be to introduce a lifetime receipts tax on assets over £125,000, levied not just on inheritances but also on gifts received throughout one’s life. (Under IHT, anything you inherit at least seven years before the death of a benefactor is tax-free.)
It is far from clear that Truss has the power, or the parliamentary majority, to carry out her chief economic adviser’s proposed abolition of inheritance tax. She has already been forced to drop her plans to cut the 45p rate of income tax. But Sinclair’s hiring reveals Truss’s instincts: to allow the wealthiest to preserve more of their income.
This is, perhaps, the most fundamental belief of the free-market Tufton Street set, of which Sinclair – as a former chief executive of the TaxPayers’ Alliance – is very much a part. Truss has, in her wilting public defence of those tax plans, defended them as pro-growth. But Sinclair’s views capture how, for many of those around Truss, cutting taxes is an ideological mission unrelated to any supposed effect on growth.
“IHT is just a bad tax,” as Sinclair described it in 2016, “an erratic tax on savings which encourages consumption and is paid at discontinuity of death.” Fixing Britain’s tax system is hard, he has written, but “you’d get about half way there with [fixing] personal taxes just by scrapping IHT double tax”.
Unfortunately for Sinclair, and all those who oppose Britain’s most substantial wealth tax, Truss appears to lack the political capital to cut IHT. Indeed, it is unclear how long she will survive in office at all.