Chancellor urged to scrap flat rate of inheritance tax

The government could raise up to £2.6 billion a year from changes to inheritance and capital gains taxes at the budget, as the chancellor scrambles to find ways to balance the public finances.
Research from the Demos think tank has costed some of the ways Labour could close loopholes in the taxing of inherited assets, raising a total of £16 billion over the course of the next parliament as the amount increases over subsequent years.
Rachel Reeves needs to find at least £16 billion of additional tax rises to fill the gap in day-to-day spending plans and prevent the return to austerity, according to the Institute for Fiscal Studies (IFS). The Labour manifesto laid out plans to raise up to £9 billion from measures such as imposing VAT on private schools and cracking down on tax avoidance.
Demos urged the chancellor to introduce a banded system for inheritance tax based on the value of assets and to close a loophole that allows households to pass on estates to their children without paying capital gains tax.
“Well-designed reform to inheritance taxation could play a key role in plugging the government’s £22 billion fiscal hole,” Dan Goss, at Demos, said. “Alongside raising revenue the reforms would make inheritance tax fairer and limit the tax burden for working people.”
The government is widely expected to announce changes to capital gains tax, which is imposed on assets that rise in value when they are sold, and inheritance tax, a levy on assets passed down to family. Reeves has been forced to find ways to generate revenues from a host of smaller taxes after ruling out increasing VAT, income tax or national insurance, which make up two thirds of the government’s tax take.
Demos called on Labour to abolish the flat rate of 40 per cent inheritance tax applied on estates worth up to £1 million for couples and switch to a 30 per cent rate on estates worth below £1 million, and a 40 per cent rate for those valued at £1 million to £2 million. A top 45 per cent rate would be applied to estates worth more than £2 million. The change would cost the Treasury an initial £410 million a year, but would meet the government’s promise to “lower the tax burden for working people”, Demos said.
The think tank also called for a cap on business relief at £500,000 for business assets in an estate, a measure that would raise £970 million a year. The government could also raise £1.6 billion a year from imposing capital gains tax on all inherited assets, closing a loophole that allows assets held at death to avoid the levy, and incentivising people to keep hold of assets until they die. The IFS has also backed the reform.
The total value of the changes would raise £2.62 billion a year, more than the cost of maintaining winter fuel payments for all pensioners (£1.4 billion) and roughly the same as the cost of removing the two-child benefit cap (£2.5 billion), both controversial policies that have been criticised by some Labour MPs.
The Treasury is modelling a range of options for changes to inheritance tax, which is expected to become a more lucrative source of revenue in the coming years because of the rising value of estates that are due to be passed on.