Good morning from New Economy Brief

Inheritance tax is in the news, for two rather different reasons. Firstly because of one person who isn’t paying it, and secondly because of the mounting rumours that it may be a leading candidate for the highly anticipated pre-election tax cut.

The myths around inheritance tax are many and various, and the politics and economics of inheritance tax interact with each other in complicated ways. The tax has important distributional consequences, and proposals exist for reform from different sides of the political spectrum. This week’s briefing explores the political and economic debate around inheritance tax and examines the proposals for reform.

Who pays inheritance tax? King Charles has been crowned, but the Monarch is exempt from paying any tax on the £15.2bn royal estate he inherited from his mother. Some have argued that this is unfair, as the rest of us have to pay a 40% levy applied on assets valued over £325,000. 

However, inheritance tax has important distributional consequences. IHT remains one of the only taxes on wealth in the UK and is an important way of transferring wealth as inequality soars. A combination of rising house prices, declining home ownership and stagnating incomes has created stark inequality between generations, but this will accelerate as newer generations inherit wealth from their parents. An IPPR report explains that “wealth transfers, such as inheritances, confer opportunity on the recipient. Taxing and redistributing transfers, either to individuals or through investment in collective services, therefore promotes equality of opportunity… As such, failing to tax wealth transfers sufficiently perpetuates economic injustice, and negatively impacts social mobility, while also constraining economic growth.

But it’s not perfect, and can be reformed. IPPR propose abolishing IHT and replacing it with a lifetime donee-based gift tax levied on the gifts received by an individual above a lifetime allowance of £125,000. After this limit is reached, any income from gifts is taxed annually at the same rate as income from Labour. This would increase the tax level on higher earners who receive large gifts and also encourages gifting to less well-off beneficiaries. It also has fewer exemptions so no one can exploit the current loopholes which allow many wealthy people to game the system and avoid paying IHT, for example by putting their assets into trusts.

  • The potential tax take. A similar gift tax has also been advocated for by the Resolution Foundation. They calculated that taxing gifts through the income tax system with allowance of £125,000 could have raised £15bn in 2020/21, £9.2bn more than the current IHT system, and would do so more progressively as most people would pay the basic rate, whilst a higher top rate helps to reduce wealth inequality by levying more from the highest earners.
  • Getting around the politics. IHT currently taxes estates, not the inheritance of the individual receiving it, making it easier to be classed as a politically unpopular ‘death tax’, rather than a social mobility enhancing gift tax, which can be framed to appeal to values of equality of opportunity and fairness. Ben Ansell’s public attitudes research has shown that emphasising the benefits of lower income taxes and higher public spending “led to a decline in just under ten percentage points in people thinking inheritance taxes were too high”.
  • Other options. The fact that IHT is one of the only taxes on wealth in the UK means it is doing a lot of heavy lifting in terms of redistribution. If there were better ways of taxing wealth more consistently, such as a land value tax, or a net wealth tax, the imperative for a tax on inheritances would reduce, although there would still be an argument from a fairness perspective.

It’s all politics. Bloomberg’s Alex Wickham recently reported that PM Rishi Sunak is “considering cutting the UK’s unpopular inheritance tax ahead of the next general election, people familiar with the matter said, a move senior Conservatives think will give his ruling party a major boost”, particularly from ‘Blue Wall’ voters. This is worth exploring. The political logic of pursuing pre-election tax cuts has two driving motives. One is the desire to do something that will leave voters feeling better off before polling day, and given that improvements to public services or rising real wages are harder for the government to deliver in the remaining 18 months or so of the parliament, tax cuts begin to look attractive. The second is a belief held by many Conservatives that lowering taxes will lead to growth, and that championing low taxes can tell a story about a kind of small-state economy a Conservative government would create that is distinct from anything other parties are offering. It is hard to see how cutting IHT fulfils either of these objectives. By its very nature few people will feel any kind of material benefit from such a tax cut, compared to cutting income tax by 1p for example (which has a similar price tag), and even the most Thatcherite of Conservatives would struggle to argue that the rate of IHT is holding back the UK economy. 

  • The language of priorities. Reading the above polling on IHT, it’s easy to see why a party in need of a polling boost and a dividing line with the opposition might be tempted by this idea, but it is also worth remembering that this is a party extremely vulnerable to the charge that they are determined to cut taxes for the 1%, as seen in the recent row over pension lifetime allowances. There is also the question of priority; while people might not like IHT, is it really a vote-moving issue for them? With the cost of living crisis devastating household finances and public services on their knees, there is a real risk of such a move backfiring and the government looking extremely out of touch with people’s priorities.
  • Opposition choices. Finally, there is the question of how opposition parties and others would respond to such a move. There are important reasons, both principled and practical, for defending taxing inheritances. In principle the idea of restricting the ability for inequality to be passed through the generations is an important one, and practically while there are options for reform it is always easier to keep an existing tax than to create a new one. But if IHT were to be abolished before an election, the above examples demonstrate that there are options to replace the revenue and actually raise taxes on the wealthy in ways which are perhaps less politically difficult than pledging to reintroduce IHT.
Weekly Updates

Local economies

Future Economy Scotland. Scotland must “embrace bold new ideas to transform the economy”, according to newly launched think tank Future Economy Scotland. Future Economy Scotland is “a non-partisan think tank that aims to create a new economy that is democratic, sustainable and just” and focuses on policies around three central aims: decarbonise the economy, democratise the economy and decommodify the economy.


Homes for Us. “We have enough homes in this country — but the wrong people own them, and the wrong people make the wrong decisions about how much rent the rest of us should pay and what conditions we should put up with” argues NEF’s Rebecca Winson. NEF’s Homes for Us campaign calls for private rental properties to be converted into retrofitted social homes and is organising communities around the campaign across England. 

Public services

Consultancy in government. After limits on Whitehall consultancy spending were dropped earlier this year, the New Economics Podcast asks “why is the government so dependent on consultants?”, “whose interests do they serve?”, and “how worried should we be about their effect on public life?”. In the podcast, Ayeisha Thomas-Smith is joined by Rosie Collington, the co-author of The Big Con: How the Consultancy Industry Weakens Our Businesses, Infantilises Our Governments and Warps Our Economies. 


Water dividends. Privatised water and sewage companies paid £1.4 billion in dividends in 2022, an increase of £540 million on the previous year according to the Financial Times’ analysis of the 10 largest water and sewage companies’ accounts. The FT highlights how the increase in dividends is not matched by an increase in investment, with the average annual spend on wastewater investment now lower than in the 1990s and 2010s.


Shell investment in fossil fuels. New research by Common Wealth finds that for every £1 Shell invested in “Renewables and Energy Solutions” in Q1 of this year, the company invested £6 in fossil fuels. The research also found that over the same period, Shell spent over 14 times as much on shareholder compensation as on investments in its “Renewable and Energy Solutions Division”.


Entrepreneurial egalitarianism. A new report published by UCL’s Institute for Innovation and Public Purpose argues that “inequality and insecurity can inhibit innovative activity at the individual level, both directly and indirectly, by diminishing the resources and capabilities which enable innovation, and disincentivising risktaking and entrepreneurialism”. It instead proposes that “more equal societies tend to be more innovative” an outlines an agenda for “entrepreneurial egalitarianism” in which “social and economic policies based on egalitarian values can support innovation”, focusing particularly on the case of the social security system and income guarantees to support entrepreneurial risk-taking.