Inheritance tax should be paid by individual heirs – NOT by estates, says Chancellor’s preferred think tank

The current inheritance tax system should be ‘teared apart’ and replaced with a new system that taxes individual heirs, not estates, an influential left-wing think tank says.

The plan – proposed by the Resolution Foundation, one of the Chancellor’s favorite think tanks – is likely to mean many more people will be forced to pay the hated tax.

But it could be attractive for Reeves when she finalizes her first budget in 10 days.

Reeves wants to raise up to £50 billion – double the amount previously thought – to spend on public services such as the NHS.

She has ruled out direct tax increases on ‘working people’, but has left the door open to higher wealth taxes on inheritances, capital gains and pensions, which would also hit the middle class.

There is growing speculation that Labor is laying the groundwork for a major reform of inheritance tax in the budget. IHT is currently levied on the value of a person’s estate – the assets he or she leaves behind – when he or she dies.

The first £325,000 is tax free, after which an estate may be subject to a flat rate of 40 per cent, which is deducted before the assets are distributed.

If you donate your house to your children or grandchildren, the threshold can be up to € 500,000. And there is no IHT payable if you leave your estate to your spouse or civil partner, meaning that in some cases estates of up to £1 million are not liable to tax.

Only one in 25 grieving families pay IHT, but income is rising as more property wealth is passed on as house prices rise.

IHT raised £7.5 billion in the last fiscal year. Estimates from The Mail on Sunday suggest this could almost double under the Resolution Foundation’s plans.

The left-wing think tank wants to exchange the tax on the estate of a deceased person for a tax on heirs who receive an inheritance.

The foundation published a paper on this subject in 2023 and confirmed last week that this is still its policy ‘to a large extent’.

Proposals would eliminate the seven-year rule

The proposed tax would not be limited to transfers made less than seven years before death, as is currently the case, but could be applied to gifts made at any time.

The tax could also see the abolition or curtailment of support measures for business and agriculture – and bring pension pots within IHT for the first time. “We remain strongly in favor of scrapping IHT and introducing a lifetime tax on recipients,” said Molly Broome, an economist at the think tank.

Former CEO Torsten Bell is now a Labor MP and a rising star in the party.

He led the think tank’s previous modeling on how a recipient-based wealth tax would raise an additional £4.8 billion annually. Key features included:

• A lifelong tax-free allowance of £125,000
• A basic rate of 20 percent tax on receipts up to £500,000
• A 30 percent tax on receipts over £500,000
• An annual donation allowance of £3,000

A similar methodology suggests that £6 billion on top of existing IHT revenues could be raised this tax year.

Reeves is also considering expanding the “seven-year rule” to 10 years, with property given away exempt if the person lives at least that long afterward.

In a book she published in 2018, the Chancellor said IHT should be reinstated or ‘shifted’ to a tax on lifetime gift recipients.

IHT is one of the most hated taxes in Britain, not least because it is paid in the immediate aftermath of a death. Critics also say it punishes the wise, who have saved all their lives, adding that it is “anti-aspirational.”

The foundation claims the tax system ‘urgently needs to respond’ to the way the rise in housing wealth and other assets has created ‘winners and losers’ based on luck, such as ‘being born to the right parents’.

‘It may well be worth tearing up the existing IHT legislation and starting over with a new system that brings about all these desirable changes at once and is fit for the coming decades and the increased flow of inheritances that these will entail,” the report concludes.

Most advanced economies tax all those who receive an inheritance, rather than the estate, and as a result take more money from their citizens.

France, for example, collects twice as much from this type of wealth tax than Britain.

A Treasury spokesman said: ‘We do not comment on speculation around tax changes outside of budget events.’