The Institute for Fiscal Studies (IFS) has put forward a comprehensive set of proposals for reforming inheritance tax in the UK, arguing that the current system is overly complex, unfair, and often ineffective. Their recommendations suggest a fundamental shift from taxing the estate of the deceased to taxing the recipients of inheritances, alongside a simplification of reliefs and a reduction in the headline tax rate.
Under the IFS's proposed model, individuals would be taxed on the gifts and inheritances they receive over their lifetime, rather than the estate itself being taxed. This 'donee-based' system would include a lifetime allowance of £175,000 per person, below which no tax would be paid. Any amounts received above this threshold would be subject to tax, potentially at a lower rate than the current 40% applied to estates, but with fewer exemptions and reliefs.
The current inheritance tax system, which has a headline rate of 40% on estates valued above certain thresholds (currently £325,000 for individuals and up to £1 million for married couples including the residence nil-rate band), is often criticised for its complexity and the various avenues available for wealthier individuals to mitigate their tax liability. The IFS argues that this leads to a perception of unfairness and that the tax is largely paid by those who are less able to plan effectively for its avoidance.
The proposed reforms aim to address these criticisms by creating a system that is easier to understand and administer, while also making it harder to avoid. By taxing recipients, the burden could be spread more widely, and the total revenue generated for the Exchequer could potentially increase, despite a lower headline rate. This approach could also encourage more equitable distribution of wealth across generations, as larger inheritances to a single individual would be taxed more heavily.
The IFS report highlights that while inheritance tax is often unpopular, it plays a role in funding public services and addressing wealth inequality. Their proposals are designed to make the tax more politically palatable and economically efficient, ensuring that it contributes more effectively to the public purse and is perceived as a fairer levy on intergenerational wealth transfers.
The Labour Party has previously indicated an interest in reforming inheritance tax, though specific proposals have yet to be fully detailed. The Conservative Government has generally been more cautious about significant changes to the tax, often facing calls from some backbenchers to reduce or even abolish it. Any move towards the IFS's radical proposals would likely spark considerable debate across the political spectrum.