Would Liz Truss dare to abolish inheritance tax?

How much extra tax does Liz Truss’ team of ministers and advisers hope to cut? Yesterday the Guardian reported that Truss Town Minister Andrew Griffith wants to abolish Inheritance Tax (IHT). The new statesman can signal that Griffith is not alone. Matthew Sinclair, chief economic adviser to Liz Truss in Issue 10 and former chief executive of the Taxpayers Alliance, is an even more vocal opponent of the tax. Sinclair’s dislike of IHT has been a recurring theme on his Twitter account since 2016.

“Inheritance rights are [less than] 1 percent of [government tax] revenue. Just let it go,” he explained in April 2016. “Caring for our family after we die is the most morally profound thing most of us will ever do. A double taxation which is perverse.

Sinclair philosophically opposes tax because it is, in theory, levied on after-tax income (in reality, some estates may have accumulated their wealth without ever paying tax, or a large portion, on the income of their family). As he said, “You won the money [and] paid tax on it. It’s up to you to dispose of it as you see fit. Property rights.” He also described IHT as “kicking a family out while they’re down,” which “almost seems like the definition of ugly.”

Inheritance tax is levied (at 40%) on estates worth more than £325,000, or £650,000 for couples. As a result, only around 4% of Britons pay it, and it accounts for 0.7% of UK tax revenue – a relatively small sum, as Sinclair pointed out.

But inheritance tax is nevertheless the most important form of wealth tax in the UK system. And it is expected to bring in £6.7billion this year, according to the Office for Budget Responsibility. That’s enough to pay for the bulk of the UK’s over £11billion foreign aid budget (which, by the way, many right-wing Tories would love to cut).

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Sinclair views inheritance taxes as both theoretically flawed and virtually inconsequential, and therefore ready to be abolished. But another view would place inheritance rights in this context: the vast majority of inherited and bequeathed wealth is currently untaxed. Rather than scrapping the IHT because it generates too little tax, the UK could reform the way it taxes inheritances to generate significantly more revenue.

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As the Resolution Foundation think tank calculated in 2018, ‘inheritance tax income represents an effective tax rate of just 3.5%’ on the £127bn of inheritances and gifts distributed (in 2015-2016). There are different options to further tax this wealth. One option – as Nick Macpherson, the former Permanent Secretary to the Treasury, suggested to me last December – would be to introduce a flat tax of 10 or 15% on the value of all property. Another option, favored by the Resolution Foundation, would be to introduce a lifetime income tax on assets over £125,000, levied not only on inheritances but also on gifts received over a lifetime. (Under the IHT, anything you inherit at least seven years before a benefactor’s death is tax-exempt.)

It is far from clear that Truss has the power, or the parliamentary majority, to implement the abolition of inheritance tax proposed by his chief economic adviser. She has already been forced to abandon plans to cut the 45p rate of income tax. But Sinclair’s hiring reveals Truss’ instincts: to allow the wealthy to preserve more of their income.

This is perhaps the most fundamental belief of the entire Tufton Street free market, of which Sinclair – as a former chief executive of the Taxpayers Alliance – is an integral part. Truss has, in his withering public defense of these tax plans, defended them as pro-growth. But Sinclair’s views show how, for many around Truss, cutting taxes is an ideological mission unrelated to any supposed effect on growth.

“The IHT is just a bad tax,” as Sinclair described it in 2016, “an erratic tax on savings that encourages consumption and is paid at the discontinuity of death.” Fixing Britain’s tax system is difficult, he wrote, but “you’d be about halfway there with [fixing] personal taxes simply by removing IHT double taxation”.

Unfortunately for Sinclair and all who oppose Britain’s biggest wealth tax, Truss appears to lack the political capital to reduce the IHT. Indeed, we do not know how long she will survive in power.

[See also: What does Michael Gove want?]

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