A study conducted by the Institute for Fiscal Studies (IFS) has found that potential cuts on inheritance tax by U.K. Prime Minister Rishi Sunak’s Conservative Party could disproportionately benefit the country’s wealthiest 1%. While the abolition of the tax could cost the U.K. £7 billion ($8.50 billion) annually, roughly half of the benefits would go to those with estates valued at £2.1 million ($2.55 million) or more. The IFS report also highlights that this move would exacerbate existing wealth inequalities in the country. It emphasizes that parental wealth is set to play an increasingly important role in determining lifetime income for younger generations.
The potential changes to inheritance tax are seen as a means for Sunak’s party to garner support ahead of the upcoming general elections. Many of the wealthiest individuals in the country have estates in constituencies held by Conservative members of parliament, so an overhaul of the tax could help secure votes for the party. The current inheritance tax regime, introduced in 1986, aims to redistribute wealth by taxing the rich and directing the funds toward those who are less well-off. However, the system has been criticized for being easy to avoid and is considered one of the most unfair taxes in the U.K.
While the inheritance tax is only applicable to less than 4% of deaths in the country, it generates minuscule revenues at present. However, the IFS predicts that in about a decade, the revenue could increase to over £15 billion ($18.23 billion). The British government argues that despite a forecast that more than 93% of estates will have zero inheritance tax liability in the future, the tax is crucial to funding public services relied upon by millions of people daily. With high inflation and interest rates impacting households and putting pressure on public finances, a reduction or abolition of the inheritance tax could further affect national spending. IFS suggests that reforms to the system, such as capping certain reliefs that create avenues for tax avoidance, could generate around £4.5 billion ($5.5 billion) in revenue, which could be allocated to public programs or tax cuts in other areas.