Inheritance tax debate: clash over economic priorities and fairness

The debate was obtained by Jon Trickett (Lab) who began by criticising the British tax system for not taxing rich people enough. He added that income from wealth is “relatively untouched” by the taxation system and suggested that “we might well be able to change the way we tax inheritance”, if a wealth tax existed.

Trickett accused the government of overtaxing hard-working people on their income. He noted that it would cost £7 billion of the Treasury’s reserve to completely abolish inheritance tax and suggested that this money might be better spent providing lower paid individuals with “some assistance on tax”.

Trickett suggested that less inheritance tax is paid on properties worth above £5 million, and that the richest estates in the country “pay virtually nothing at all”. Meanwhile, “people who work hard and have maybe managed to accumulate more than £1 million in their lifetimes are paying 40% tax on the residual amount they arrive at”, he added.

Trickett noted that the Institute of Fiscal Studies (IFS) argued that “we should avoid all of the reliefs and the systems by which people can escape inheritance tax, which makes it unfair and skews the taxation system as a whole”.

He said he believed that abolishing inheritance tax was a political strategy, not a fiscal one, noting that approximately £1.5 billion in inheritance tax has been paid (presumably over the course of a year, though he did not specify) in ‘blue wall’ seats.

Peter Gibson (Con) said he supported the complete abolition of inheritance tax. He observed that it is often said that “inheritance tax is a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue”.

Gibson argued that it is ‘unfair’ that those who have children can be given a significant tax advantage that does not benefit those who either do not choose to have children or are unable to have children. Therefore, he called on the government to equalise the inheritance tax threshold at £500,000 for everyone to enable even childless couples to leave an estate of up to £1 million free of tax.

Ranil Jayawardena (Con) suggested that by lifting the inheritance tax threshold the economy will grow. He quoted a spokesman for a Swedish business body, who said that when Sweden scrapped inheritance tax it increased tax revenues.

Grahame Morris (Lab) draw attention to the fact that only 5% of people pay inheritance tax, wondered how ‘fair’ it would be to either eliminate inheritance tax or provide further concessions to those currently liable for it. (Not at all, was the implication.) In something of a diversion to the debate he suggested that if the government wish to provide support for the other 95% of ‘ordinary working people’, they need to consider replacing council tax with a proportional property tax.

Morris said that the current inheritance tax system is already generous, allowing up to £325,000 to be passed on tax-free. In cases where a child or grandchild inherits an estate with a home, the tax-free threshold is increased to £500,000. Estates exceeding these thresholds are subject to a 40% tax rate, which means that a £1 million estate would still pass on £800,000 to the beneficiaries.

He urged the government to investigate and close the inheritance tax loopholes as this tax “is meant to address widening inequality in society by taxing those with the greatest assets”.

The former Labour Party chair, Ian Lavery, argued that the impact of scrapping inheritance tax would fall upon the ‘less well-off’ members of society and would only benefit the richest. Lavery noted that in 2022-23, “only 1.9% of those estates that had to pay inheritance tax were in the north-east of England”.

Discussing inheritance tax exemptions and reliefs, Lavery gave an example of one of the largest landowner in Northumberland donating a painting to a museum in lieu of tax. “It is unreal to think that the wealthiest can avoid inheritance tax by giving a painting instead”.

Lavery concluded by saying the government should increase the rate of inheritance tax and eliminate exemptions, to help alleviate the current obscene gap between the rich and the poor.

Zarah Sultana (Lab) She suggested that an annual wealth tax of just 1.5% on assets over £10 million, for example, would raise about £12 billion a year. This could help fund schools and hospitals.

Jim Shannon (DUP) disagreed with Labour MPs and supported the idea of abolishing inheritance tax. He considers it “one of the most unfair taxes in existence”, and something that punishes a lifetime of hard work. He added that inheritance tax imposes a high administrative and compliance burden on taxpayers and their families while raising only a small amount of revenue for the government.

Shannon argued that inheritance tax “violates the principle of double taxation” as it taxes people on income or savings on which they have already paid tax during their lifetime.

The SNP spokesperson, David Linden, reckoned that abolishing inheritance tax is ‘low’ down in people’s priorities given the current cost of living crisis. He considered the idea ‘absurd’ and suggested that scrapping or reducing this tax only “deepens further the chasm of inequality that no modern or fair society should have”.

Linden praised the Scottish government for creating a ‘progressive tax’ system even with their limited power. He stated that “the Scottish government have ensured that the tax and social security system is progressive and equitable, so that everybody in Scotland—regardless of their background—has the opportunity to thrive”. The SNP MP suggested that if the British government is considering abolishing inheritance tax, “they must transfer the necessary powers to legislate on inheritance tax to the Scottish Parliament, either through the means of further devolution or—my desired option—independence.”

James Murray (Lab), the Shadow Financial Secretary, recognised that all parents “have a natural desire to pass on to their children what they have worked hard for in life” but thought that a tax cut that would benefit only the top few per cent “cannot be justified as a priority when taxes for working people are already so high and set to keep rising.”

Murray wondered how the government would pay for the abolition of inheritance tax. He urged the minister to be ‘upfront’ about the government’s plans: “If they are not considering abolishing inheritance tax, they should say so now.”

The Financial Secretary, Nigel Huddleston, responded to MPs’ comments. He acknowledged that “[t]here is a great deal of speculation” about potential changes to the tax system but said ay announcement would be made in the normal way at the 6 March Budget.

The minister said that while the UK does not have a specific wealth tax, the government ‘do tax wealth’ in numerous ways. He quoted OBR forecasts indicating that for 2023-24, the government can expect inheritance tax revenues of about £7.6 billion, capital gains tax revenues of £16.5 billion and stamp duty tax revenues of about £13 billion. We also have a progressive income tax system, he added.

The minister highlighted once again that most estates do not pay inheritance tax, with only 5.1% of UK deaths forecast to result in an inheritance tax liability in 2023-24. He defended the changes made to the system since 2010 saying they had made it fairer and reduced administrative burdens.

The minister disagreed with members who had said that the wealthiest do not pay inheritance tax. He said that statistics for 2020-21 show that “taxpaying estates valued at over £1 million accounted for 81% of the total inheritance liability”.

In a brief winding up speech Jon Trickett expressed his disappointment that the minister had refused to deny that the government is looking at inheritance tax. He is looking forward to the Budget on 6 March.

You can read the full debate here.