Rishi Sunak is reportedly contemplating a cut to the inheritance tax in a bid to garner support, with plans suggesting a reduction in the current 40% rate for estates exceeding £325,000. The proposed changes aim to pave the way for eventual abolition, a move seen by some as a strategic political maneuver.
Inheritance Tax Cuts
Critics argue that the tax cut, impacting only around 4% of deaths, poses a considerable unfunded expense, estimated at £7.2 billion annually. The inheritance tax, deemed by some as the “most hated tax” in Britain, has sparked discussions at the highest levels of government, but formal plans are yet to be confirmed.
According to the Sunday Times, the measures would allow for the levy’s ultimate elimination. Downing Street, though, has made an effort to downplay rumors that the prime minister was formulating proposals to lower the tax. Currently, estates above £325,000 are subject to 40% Inheritance Tax Cuts, with an additional £175,000 exemption for a primary property if the estate is transferred to children or grandchildren. Married couples are able to split their allowance, so parents may give their kids £1 million without having to pay any taxes on it.
Removing inheritance tax, which he claimed 96% of individuals “never” pay, would be “an unfunded tax cut of £7.2 billion per year,” he said. The lawmaker went on, “The Conservative Party poses the greatest threat to the economy.” In a letter to Chancellor Hunt, Jones and Labour have demanded an explanation of how any modification, or eventual elimination, would be funded from the Treasury’s already limited funds.
How inheritance tax is catching Britons out?
- The allowance increased to £ 1 million for a couple, meaning that the vast majority of people are unimpacted by the tax.
- One senior Government official, however, told the Sunday Times that surveys show this tax to be the most unpopular in Britain.
- Another commenter expressed it this way: “People also feel it is just wrong to tax people on income that has already been taxed and at a time when they are grieving.”
- The Conservatives currently trail Labour by as much as 20 points in the polls, with the party eager to introduce policies likely to win back support.
- There has been pressure within the Tory party to change or scrap the inheritance tax, with former prime minister Liz Truss among those calling for it to be axed.
Inheritance is growing, do we need a Tax Cut?
Since 1979, inheritances have soared from £20bn to over £100bn, according to our analysis. This does not mean that the tax system discourages saving and passing on assets. Not even ‘peak inheritance’. The Resolution Foundation predicts that inheritance values will double by 2046. No inheritance tax decrease is needed to prevent inheritance from leveling down in future decades.
Given that inheritance tax is only paid on estates exceeding £325,000 and a £175,000 housing allowance, couples’ inheritance tax threshold has already reached £1m (or £500,000 for a single person). This is why just 6,000 estates pay inheritance tax annually. Given the rising amounts of inheritance, any tax decrease would only benefit a few rich individuals and not encourage inheritance.
We need a national conversation about inheritance
The good news is that the nation has benefited from the person who flew a kite in the prime minister’s honor. It is time for a national dialogue about inheritance to begin. More data on this, which Demos will be releasing in the coming weeks, paints a much more nuanced picture than just supposing that lowering inheritance tax is a means of winning over people. To stay updated on this study, subscribe to Demos’ newsletter and follow @Demos for news and updates.
Inheritance Tax rates
The typical inheritance tax is 40%. Only the portion of your estate over the threshold is taxed. Your estate is £500,000 and your tax-free threshold is £325,000. Inheritance Tax is 40% of £175,000 (£500,000 minus £325,000). Leave 10% or more of the ‘net value’ to charity in your will to decrease Inheritance Tax to 36%. (Net value is estate value less debts.)
Pros and Cons of Inheritance Tax Cuts
Pros of Inheritance Tax Cuts:
- Economic Stimulus: Lower taxes on inheritances can stimulate economic growth by encouraging savings and investments.
- Family Preservation: Reduced tax burdens can help keep family farms and small businesses intact.
- Capital Formation: Lower taxes may motivate individuals to accumulate wealth, leading to increased savings and investments.
Cons of Inheritance Tax Cuts:
- Increased Wealth Inequality: Lower taxes can exacerbate wealth inequality by allowing large estates to pass on wealth with minimal taxation.
- Revenue Loss: Tax cuts result in significant government revenue loss, potentially leading to cuts in public services or tax increases elsewhere.
- Less Wealth Redistribution: Lower taxes can reduce wealth redistribution efforts, leading to a society where economic advantages are determined by family background rather than individual merit.
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