Anthony Browne MP is Chair of the 1922 Treasury Committee, a former member of the Treasury Select Committee, and on the advisory board of the Institute of Fiscal Studies.
Back in 2009, when Gordon Brown was ahead in the polls and planning an early election, there was a huge political debate over inheritance tax: the papers were full of stories about people upset at having to sell their family home when their parents died.
I spoke one evening to my Dad about it, and he said: “just make the threshold £1 million, and it will kill the whole issue politically.” I passed on the suggestion to George Osborne’s Chief of Staff, and a few weeks later sat in front of the then Shadow Chancellor as he announced the Conservatives’ new inheritance tax policy: making the threshold £1 million. The proposal changed the political narrative so much that it transformed the Tories from looking like losers to looking like winners. The polls shifted, Brown famously bottled his early election – and he lost a year later.
We could clearly do with a similar change to the political narrative now. But could inheritance tax perform the same trick again? As in 2009, there are growing calls to abolish this most hated of taxes, which infringes on the basic human instinct to pass on to your children the worldly goods that are the product of a lifetime of striving. It is also one of the most perversely designed ones – so full of complex exemptions that it has created a whole industry of estate planners that enable the wealthiest to pay less than middle class families. The threshold of £325,000 has not been changed since 2009, so although more estates are falling into the tax, only about five per cent pay it.
There are overwhelming arguments for radically reforming inheritance tax. Nonetheless, the immediate question before the Prime Minister is whether inheritance tax be abolished, rather than reformed?
The arguments for abolition are that it would create certainty for the elderly and their heirs. Politically, it would certainly grab public attention, and help change the narrative, showing that the Government is capable of taking radical decisions (although I think it has less political resonance now than in 2009). Those who would applaud loudest would be the older middle classes – people we need to give a good reason to come out and vote Conservative. Abolition would certainly be popular among Tory MPs, many of whom are adamant they want to scrap it, rather than reform it.
Jersey and Guernsey have never had inheritance tax, but abolishing it has become an international trend in recent decades. The countries that have scrapped inheritance or estate taxes include Canada (1972), Australia (1979), India (1985), Malaysia (1991), New Zealand (1992), Sweden (2004), Hong Kong (2006), Singapore (2008), Austria (2008), Czech Republic (2013), and Norway (2014). Some, such as Portugal and Hungary, have abolished inheritance tax for close relatives. In the US, the threshold is so high (effectively over $11 million) that very few pay it.
The abolition of inheritance tax in other countries directly affects the UK. The internationally mobile wealthy avoid keeping assets in the UK, which would impose inheritance tax on them, and instead keep them in other countries where their children can inherit without paying anything. There are estimates that over £1 trillion of assets are kept out of the UK just to avoid inheritance tax.
But there are also arguments against abolition. The most powerful is that it would cost the Government badly needed revenues – in 2021/2, the Treasury raised £6.1 billion from inheritance tax, a 14 per cent increase on the previous year. There are also claims that it would increase wealth inequality (although since the wealthy don’t pay, that seems unlikely), and reduce social mobility (but some of the most egalitarian countries in the world, such as Norway and Sweden, don’t have inheritance tax). Unlike scrapping stamp duty on primary residential properties, scrapping inheritance tax would not lead to an instant economic stimulus (although it might lead to the wealthy bringing their money back into the UK).
There are also concerns that we should be cutting taxes to improve productivity and work incentives, rather than helping those whose parents happen to die. Some on the Conservative side worry about what political message it would send – that we are directing cuts at the elderly wealthy rather than striving workers. Finally, although inheritance tax is very unpopular, very few people ever actually pay it and so, unlike other tax cuts, the overwhelming majority of voters would not directly benefit.
If the arguments against abolition – especially the billions it raises – are too strong, the Government has many options for radical reform that would make it simpler, fairer, and enable the Treasury to dramatically reduce the rate while being fiscally neutral.
The All-Party Parliamentary Group on Inheritance, chaired by the Conservative MP, John Stevenson, produced a detailed report recommending many sensible reforms. Essentially, these amount to scrapping almost all exemptions to make sure that all larger estates pay tax, and use the savings from these to make the rate so low – say, 10 per cent – that people would not feel the need to plan their affairs to avoid it. Exemptions that could be abolished include pension pots (this would generally reduce the rate of tax, since at present heirs need to pay income tax on inherited pensions), and AIM listed shares.
More controversial exemptions that the APPG recommends are brought into inheritance tax are agricultural property and private businesses. One MP mentioned a constituent who joked about passing on his private business worth £700 million to his son without paying any tax. Large farmers pass on vast estates of many thousands of acres without tax being due. In my constituency, farmers complain that land prices are pushed up by City folk buying farm land just to avoid inheritance tax.
However, bringing farms and privately owned business within the scope of inheritance tax would be seen as an attack on our core supporters – farmers and entrepreneurs. There are powerful political and practical reasons why they are exempted – such as that small businesses and farms would have to be sold off, closed down or broken up to pay the tax. There are mitigations: there could be a threshold (such as only farms or small businesses worth over £10 million are included), and they could be given 10 years to pay. If the rate was 10 per cent, that would be a payment of one per cent a year, which should be manageable.
But the biggest exemption of all is so-called potentially exempt transfers, whereby inheritance tax can be avoided if people transfer assets to their heirs more than seven years before dying. This is a blatant loophole for the very wealthy, and is capricious (what if someone lives just six years and eleven months?). This could be replaced with a generous annual gift allowance. But again, if the tax rate is just 10 per cent, removing this exemption will not be that dramatic.
Finally, the Government should scrap the main residence relief (an extra £175,000 allowance for family homes) so that the tax is neutral on the type of asset being inherited, and simply raise the threshold to cover it (ensuring people can keep family homes). A million pounds is not as much now as it was in 2009, but is still a good number.
Simplifying it and lowering the rate would be a very welcome reform to the tax system and could be done in a roughly cost-neutral way. But whether such change would deliver the same political punch as abolition, and change the political narrative as Osborne did in 2009, is a very different question.