The new government must make inheritance tax fairer, simpler and more transparent, a think tank has said.
A report on the future of IHT by Demos highlighted that the tax is poorly designed and “ripe” for reform.
The Labour government is looking at changes to IHT as a way to unlock more public funds, which Demos has said is “the right place to start”.
However, alongside raising public funds, the think tank said public concerns about IHT needed to be addressed which could only be done by making improvements to the tax.
Analysis by Demos revealed the UK could increase revenue, progressivity and public support simultaneously.
The think tank believed the UK could learn from the South Korean system when it comes to raising more revenue.
According to the report, around 4.2 per cent of inheritance passed on in 2019-20 was paid in tax, the figure in South Korea was 9.7 per cent in 2022.
If taxing the same proportion of inheritance in 2019-20, the UK government would have raised around £11.6bn, an additional £6.5bn that what it actually raised.
Additionally, by taxing the same proportion of lifetime wealth transfers as South Korea, the UK could have raised an additional £2.5bn on top.
The IHT system could also be made fairer, according to Demos as in the UK the wealthiest estates tend to pay lower effective rates.
Those worth between £2mn and £7.5mn paid 25 per cent in 2020-21, while those more than £10mn only paid 17 per cent.
While in South Korea the effective rate reached 33 per cent for estates between £6mn and £30mn and 44 per cent for those worth more than £30mn in 2022.
According to Demos the UK could learn from Norway when it comes to reforming policy by shifting from inheritance and instead towards ‘inherited capital gains’.
Inherited capital gains are uplifted in the UK as they were in Norway but in 2014 the country began taxing these while simultaneously abolishing IHT.
Although Demos highlighted that significant revenue would be lost if the UK did the same, it suggested the UK could begin taxing inherited capital gains while offering a smaller IHT cut.
According to the think thank the most promising opportunities for IHT reform include reworking the exemption for business property to ensure it provides value for money, introducing progressive rates.
As well as removing the capital gains uplift and charging CGT when the asset is sold and clamping down on remaining non-dom avoidance opportunities.
alina.khan@ft.com
