Whenever a politician announces that they are going to review or change something then we should all worry. When they intend to change a tax then we know it is probably going to cost us money. Andy Burnham – not yet an MP but someone hoping to occupy 10 Downing Street - has raised the issue of abolishing inheritance tax (IHT) and replacing it with a new levy on assets to pay for a National Care Service.
IHT currently takes in just over £9bn a year while spending on social care is expected to cost £39bn a year by the end of the decade so there is a substantial gap in the calculations which will have to be met somewhere.
Homeowners and those with assets and pensions (the latter is being added to the inheritance tax take from April 2027 and is expected to add a further 50,000 estates) are already predicted to pay more in the next few years due to a broadening of the scope of the tax and fiscal drag caused by freezing until 2031 the £325,000 threshold at which liability starts. The nil-rate band at which IHT begins has been frozen since 2009 but, if it had risen with inflation, it would now stand at £532,501.
IHT revenues have increased from £2.9bn in 2011/12 to a forecast £9.1bn in 2025/26 with the number of estates involved having risen from 2.7% sixteen years ago to just under 5% now. The Office for Budget Responsibility (OBR) believes that by 2030/31 the amount collected will have reached £14.5bn and will affect 10% of all estates.
That IHT is once more being used as a political football isn’t surprising but is a bit depressing. It is a policy to be floated to potential voters to show that the “wealthy” must be punished for their investment, their thrift, and their hard work. The reality is that IHT is no longer the preserve of the wealthy. The truth is that it increasingly impacts on more and more ordinary homeowners who have simply seen the value of their property and assets increase over the last few decades.
The irony of this is that the increase in scope of IHT won’t hit the very wealthy who have advisers and accountants to ensure their liability is reduced. It will be those in the middle who cannot afford such advice and are hit with an increasingly punitive targeting of their homes, pensions, savings, and assets.
This enormously unpopular tax - recent surveys of the public have found that 54% would like the abolition of IHT altogether - targets ordinary people who have worked hard, saved, built up a pension, and paid off their mortgage.
Homeowners, people with a private pension, someone who has acquired assets through work and investment must always pick up the tab. This idea is counter intuitive in any society where thrift, effort, saving, and work should be encouraged and applauded. Instead, it is being punished rather than rewarded. Individuals who believed they were doing the right thing in hoping that their lifelong efforts would result in them being able to provide a nest egg for their families are once more to be taxed for simply accumulating some assets over their lifetime. It cannot be right.
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