Abolishing inheritance tax will provide little relief

Editorial: Appealing to the Conservative base may be the PM’s best hope realistically, but it also means he isn’t even trying to reach out to the wider electorate – the young and hard-pressed families who expect to inherit little from their elders

Only 27,000 families are affected by inheritance tax (Dominic Lipinski/PA) (PA Archive)

For something that hardly affects anyone, and is in any case paid only after one passes away, inheritance tax appears to hold a strange fascination for the Conservative mind. It is as though there is something in the psyche that refuses to accept the maxim, “you can’t take it with you.”

Scrapping inheritance tax is an old favourite, and is often floated when ministers are searching for an eye-catching initiative that could, they believe, help them to win a looming, somewhat difficult, general election. Sometimes, as now, it smacks of desperation.

Taxes on the estate of the deceased are certainly unpopular, if not macabre, and every so often the Tory spin machine will seek to capitalise on this resentment and put out the notion of abolishing the levy, or radically increasing the threshold at which it must be paid. This is indeed happening again now, as Rishi Sunak seeks to create more “dividing lines” between his government and the opposition.

The recent retreat on net zero is another textbook example of this strategy. There was no pressing need to smash the cross-party consensus on climate change; it was merely an attempt to confect a policy contrast for short-term electoral gain. Many more (almost arbitrary) populist policy proposals for the next Tory manifesto will be set out as campaigning gathers pace, and we have no doubt that migration, trans rights, and other “culture war” issues will be ruthlessly exploited. Whatever else, the British general election of 2024 promises to be an unusually dirty and bitter affair.

Perhaps because what used to be called death duties impinge on people’s lives only rarely – a fact that no one is complaining about – inheritance tax is widely misunderstood. Only 3.7 per cent of estates are affected, the equivalent of some 27,000 families in all. Where a couple is involved, the effect of a relatively high basic threshold (£375,000) combined with spousal exemptions means that they can pass on as much as £1m to their descendants entirely tax-free. That threshold should be viewed in the context of the value of the average UK home – £288,000.

There are also additional reliefs applicable to farms and businesses that are passed on; and increasingly, personal pension pots are being used as highly tax-efficient methods of avoiding taxes on bequests.

As ever, the rich can get richer by playing the system – and the super-rich, with access to lawyers and offshore trusts, can get away with paying zero tax. When an individual dies before the age of 75, funds remaining in their pension escape income tax entirely – there is income tax relief when the money is paid into the pension, and no income tax when it is taken out. Furthermore, any funds that remain in someone’s pension when they die (at any age) are not subject to inheritance tax.

In other words, a vast swathe of personal wealth is simply ignored by the state. The present set-up is extremely generous to the descendants of the already wealthy – a group concentrated in London and the South East who, unsurprisingly, tend themselves to be older “baby boomers” as well as Conservative voters.

Abolishing inheritance tax would deprive the Exchequer of some £6bn – one of the smaller tax takes, but a significant one. It seems an odd move when vital infrastructure schemes such as HS2 are being mutilated for a supposed lack of funds.

There’s little reason to think that getting rid of inheritance tax would raise the economic growth rate as effectively as capital investment. It would certainly create an even less equal society, adding in particular to disparities in housing. There is no case for raising the threshold. But some cuts in inheritance tax seem to be on the cards, as far as No 10 is concerned.

This is entirely consonant with the other story doing the rounds in the media, which is that the Conservatives will extend the “triple lock” on increases to the state pension. Once again, this is a measure that benefits the old at the expense of the young, and exacerbates the intergenerational divide that is scarring society.

It is also consistent with the easing of our CO2 emissions targets, which will affect those growing up now rather than their parents and grandparents. “Culture war” issues and Euroscepticism are additional sharp dividing lines, as much between generations as between classes. In this context, it hardly seems surprising that Labour beat the Conservatives by 43 percentage points among 18- to 24-year-olds at the last election (or that Sir Keir Starmer seems quite keen on enfranchising 16- and 17-year-olds).

Mr Sunak seems to be following an undeclared “core vote” strategy, seeking to consolidate the Conservative baseline vote – say about 30 per cent of the electorate – with the hope that an improving economy next year will add a few more percentage points and deprive Labour of a majority.

That may be Mr Sunak’s best hope, realistically, but it also means that he isn’t even trying to reach out to the wider electorate – the young and hard-pressed families who expect to inherit little, if anything, from their elders. Talk of prioritising unfunded tax cuts for the rich, along with significant and indefinite guaranteed increases in the state pension, is also inconsistent with the government’s claim to be pursuing a strategy of fiscal responsibility.

Only a few days ago, the chancellor, Jeremy Hunt, declared that it would be “virtually impossible” to cut taxes before the election. The country may well wonder why it got rid of Liz Truss for her recklessness a year ago if Mr Sunak, once thought so responsible and fair-minded, is just going to recycle her policies. The prime minister should think again.