Earlier this year, Demos launched a new project on the UK’s ‘New Age of Inheritance’. We’ve found that the real value of inheritances transferred annually in the UK has doubled roughly every 20 years since 1979 to over £100bn a year.
So it was no surprise that Rishi Sunak has, allegedly, decided to take a look at inheritance tax in the run up to the next election. According to Bloomberg(£), the Prime Minister is considering cutting inheritance tax in order to claw back some of Labour’s poll lead and appeal to ‘Blue Wall’ voters. Before Downing Street makes a decision, they should take a look at Demos’ research which shows a more complex picture.
Inheritance is growing, do we need a tax cut?
The first question should be: do we need to cut inheritance tax?
Our research has shown the value of inheritances has grown substantially since 1979, from around £20bn a year to over £100bn. This does not suggest that there is a problem with the tax system dissuading people from saving and passing on their assets. We have not even reached ‘peak inheritance’. According to the Resolution Foundation, this is expected to happen in 2046, where the value of inheritances is expected to be over two-fold the level it is today. There is no need to cut inheritance tax in order to prevent inheritance from levelling off over the coming decades.
When you consider that inheritance tax is only paid on estates over £325,000 and another £175,000 allowance applied to your home, this means for spouses the inheritance tax threshold has already hit £1m (or £500,000 for a single person). This is why only 6,000 estates actually pay inheritance tax each year. Any tax cut is not only unlikely to incentivise inheritance (given the growing levels of inheritance) it would also be a change that would benefit only a handful of already wealthy people.
We should be thinking about reform, not tax cuts
Rather than thinking about cutting inheritance tax we should be thinking about reforming it. One in ten estates in Germany are subject to inheritance tax, double the level of the UK. Other G7 countries such as Japan and Italy also have higher levels of estates subject to inheritance tax.
We also know that the current system favours the already well-off. Our research found that a typical person in the South of England born in the 1970s is set to inherit three-and-a-half times as much as a typical person in the North East. It will be hard to ‘level up’ the country given the growing inequality in inheritance.
Furthermore, longer life expectancies mean that people are going to receive inheritances much later in life than was previously the case. The average inheritor born in the 1980s will be 61 years old. Not only is it likely that many of these people will already have accumulated significant levels of wealth but inheritance is unlikely to make much of an impact on their lives. Inheritance is not going to help ‘set people up’ for the future, it is more likely to solidify the inequalities that have already emerged.
We need a national conversation about inheritance
The good news is that whomever has flown a kite on behalf of the Prime Minister has done the country a favour. We need to start a national conversation about inheritance.
Demos will be publishing further research about this over the coming weeks and it shows a much more complex picture than simply assuming that cutting inheritance tax is a way to appeal to voters.
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