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18 April 2023

Why cutting inheritance tax would be the most regressive move possible

Rishi Sunak’s plans wouldn’t help the middle classes – only the ultra-rich.

By Jonn Elledge

There are two facts about inheritance tax that are pretty much unavoidable. The first is that it is one of the easiest forms of tax to justify. Taxing income or investment potentially deters things that economists generally deem to be good, such as, well, income or investment. Taxing the estates left by the dead is not, by contrast, going to deter people from dying. And if you have a choice between raising government income by taking money from the living or taking money from the dead then surely it should be no contest, should it? The dead don’t need money. The dead don’t vote. 

This, though, runs slap bang into the second unavoidable fact about inheritance tax, which is that most people just don’t see things that way. Polling from YouGov shows that approximately half the population thinks inheritance tax is unfair (27 per cent) or very unfair (22 per cent); only a fifth thinks it fair (17 per cent) or very fair (4 per cent). A significant number of people instinctively recoil from inheritance tax, as if we were taxing not merely the estate, or the still-living people who didn’t earn but stand to benefit from it, but taxing the dead themselves. (George Harrison may have been on to something when he wrote “Taxman”.) 

Opposition to inheritance tax is – this’ll shock you – even higher among Conservative voters, a group one might generally assume to leave bigger estates behind them. As of October 2022, the same YouGov data showed 57 per cent of Tories thinking it some brand of unfair, as opposed to just 18 per cent thinking it fair. Even Labour votes, though, aren’t exactly pro inheritance tax (42 per cent unfair, 28 per cent fair). Put all that together, mix in a dash of Rishi Sunak’s personal circumstances, and the Prime Minister’s widely reported enthusiasm for promising an inheritance tax cut this side of the next general election becomes entirely comprehensible. 

[See also: What people miss when they criticise inheritance tax]

It remains, however, an extremely bad thing to do, for a whole raft of reasons. For one thing, inheritance tax does not, as people like to whinge, mean taxing the same money twice: the people whose estate is being taxed, and the people who actually lose out from the existence of inheritance tax, are not the same people. Perhaps if we renamed it “death duty” people would understand it better. Perhaps this would cause other problems.

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Secondly, hardly anyone pays inheritance tax anyway. There’s nothing to pay on any estate worth £325,000, or if you leave everything above that to your spouse (to be fair to the government: not forcing the recently bereaved to sell their homes to pay a tax bill seems fair enough). Throw in the fact that the threshold rises to £500,000 where a house is left towards kids or grandkids, and just 5 per cent of estates incur a single penny of inheritance tax at all. What Sunak is talking about here is a tax cut for the ultra-rich. 

Lastly – the state needs more money. There is a vast amount of unearned housing wealth in this country, given the property boom the UK has experienced since the 1970s. The easiest place to tax is at the point when people no longer need that wealth. So the idea of prioritising this tax cut right now, in the middle of a cost-of-living crisis, when nurses are being told they can’t have an inflationary pay rise, is absolutely perverse. 

Worse, though, is that polling suggests it may well be popular. This bloody country, eh?

[See also: In defence of inheritance tax]

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