The annual amount raised by inheritance tax will rise from £7 billion to £15 billion over the next decade as the hated ‘death duty’ hits more families, a report has found.
As each generation amasses more wealth, those who inherit will have to pay more to the Treasury, the Institute for Fiscal Studies (IFS) said.
The analysis comes as the Prime Minister is said to be weighing up scrapping inheritance tax (IHT) in a voter-friendly offering ahead of the next election.
While IHT affects just 4 per cent of estates at the moment, the IFS report suggested it will hit more than 7 per cent in 2032-3.
In a poll answered by 3,203 This is Money readers, 48 per cent supported abolishing inheritance tax, while 28 per cent said the threshold should be raised and 12 per cent supported cutting the rate. Just 2 per cent said it was fair and should be left alone.
> Worried about IHT? Ten tips to cut your family’s inheritance tax bill
Prime Minister Rishi Sunak is said to be weighing up scrapping inheritance tax in a voter-friendly offering ahead of the next election
The number of people affected by the tax will also grow.
In a decade, one in eight (12 per cent) are set to have inheritance tax due when either they or their partner dies.
The research suggested that the growth in the size of inheritances will be much stronger than official forecasts suggest, increasing the tax take for the Government.
Inheritance tax is levied at 40 per cent, but the vast majority of estates fall below the threshold at which the charge applies – which is up to £1million for a couple.
There is a dramatic variation between different parts of the country. Nearly a quarter of people (23 per cent) in London are in line to pay the tax in a decade – twice the national average and five times higher than in the North East.
The IFS found the wealthiest 1 per cent of society – those with estates of £2.1million or more – would get half the benefit of scrapping inheritance tax, saving them £1million on average.
Next year, the wealthiest fifth of parents will bequeath an average of £380,000 per child, and pay inheritance tax of around 10 per cent of this amount. By contrast, the least wealthy fifth of parents will leave less than £2,000 per child.
The report also found a huge difference in wealth. By the age of 50 to 54, children of the richest fifth of parents have accumulated an average of £830,000, while children of the least wealthy fifth only have an average of £180,000, it said.
IFS calls for overhaul of IHT
The think-tank called for an urgent improvement in the IHT system if it is kept, arguing that it promotes inequality and undermines social mobility.
David Sturrock, from the IFS, said: ‘There are reasonable arguments for and against an inheritance tax. But as inheritances grow in size, it’s increasingly important that we address problems in the current system.
‘The Government should abolish the special treatment given to business assets, certain types of shares, agricultural assets, pensions and homes passed to direct descendants. These exemptions and reliefs open up channels to avoid inheritance tax.
‘This is costly, unfair and distorts economic decisions. Reforming them could raise as much as £4.5billion in additional revenue.’
Rishi Sunak has been under pressure to clarify his position on IHT after it was reported at the weekend that he was considering scrapping the charge if the public finances allow.
One proposal being considered is for Mr Sunak to announce his intention to phase out the levy by reducing the 40 per cent inheritance tax rate in the Budget in March, while setting out a pathway to abolish it completely in future years, according to The Sunday Times.
Downing Street has sought to play down the reports, with Mr Sunak stressing Government efforts to halve inflation.
Cabinet minister Grant Shapps over the weekend called inheritance tax ‘punitive’ and ‘deeply unfair’, but said that Chancellor Jeremy Hunt was in a ‘fiscal straitjacket’.
The latest figures, for the tax year 2020 to 2021, show that just 3.73 per cent of deaths in the UK resulted in an inheritance tax charge.
There has been pressure from the Tory right to change or scrap IHT, with former prime minister Liz Truss among those calling for it to be axed.
