Rising inheritances and deficit may hasten IHT change

In 2018, Chancellor Philip Hammond asked the Office of Tax Simplification to review Inheritance Tax5. However, subsequent events have meant that the tax regime for transfers of wealth between generations has not been revised, though Mr Hammond’s next-but-one successor Rishi Sunak could yet dust-off two OTS reports6.

A big deficit caused by the pandemic points to unwelcome tax rises. Some economists see tax on transfers of wealth as a way to generate revenue without stifling the economy, whilst also acting to improve social mobility. One influential thinktank recently explored inheritance and inequality.

The Institute for Fiscal Studies’ April 2021 paper, Inheritance and inequality over the life cycle: what will they mean for younger generations? identifies trends that could influence policymakers’ thinking on taxation of wealth transfer, whether during someone’s lifetime or after death. One key finding is that inheritances have formed a rising part of national income for the past five decades.

Inequality of inheritance

The IFS calculates that inheritances for those born in the 1960s will on average equal 9% of their other lifetime income, compared with 16% for those born in the 1980s. If this trend of rising levels of inherited wealth continues, the gap between rich and poor families can only widen; a more stringent version of IHT could mitigate that.

A major impact clearly stems from parental wealth. The IFS projects that people within each of the two age groups having parents in the top one-fifth on the wealth scale will receive average inheritances that deliver a lifetime income boost of 17% or 29%, respectively, but only 2% or 5% if their parents are in the bottom one-fifth on the wealth scale.

So, the younger group will receive a greater boost from inheritance than the older one and within both groups those with wealthier parents will benefit far more, heightening inequality. With social levelling-up prominent on a financially-stretched government’s agenda, IHT changes could prove costly for the better-off. It’s sensible to prepare for all scenarios, taking expert advice on strategy.

5gov.uk, 2018, 6gov.uk, 2019

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