Healey Asked for Budget Ideas. Here’s One: Abolish IHT

The new Chancellor has reportedly asked every civil servant working at HM Treasury for policy ideas for his first Budget in October. If he is also open to suggestions from former Treasury staff then I have one which will be both economically sound and incredibly popular: abolish Inheritance Tax.

Inheritance Tax (IHT) may be a small tax, but it generates an outsized amount of political heat. It brought in £8.2bn in 2024/25 (approximately 0.7% of total UK tax receipts) yet consistently polls as one of the most resented levies in the country.[1] It is a tax that does comparatively little in the way of revenue raising while imposing a disproportionate burden of complexity, distortion, and avoidance activity.

In an earlier piece for Great British Think Tank, I set out some of the criteria which economists use to judge a tax. These are: does it raise revenue efficiently; is it simple to administer; and does it distort behaviour as little as possible? In that earlier piece I explained that Stamp Duty Land Tax (SDLT) performs poorly against all three and that it is the most damaging tax on the books. While Inheritance Tax isn’t quite as bad as SDLT, it still fails when measured against these criteria.

A tax that rewards planning over production

The IFS-led Mirrlees Review concluded that the current hodgepodge of taxation of inheritance and wealth transfers is incoherent and inefficient, singling out the taxation of savings and transfers as an area where ‘unnecessary distortions’ persist.[2] It concluded that as the current 40% rate applies only above a threshold, and only to transfers not otherwise covered, it creates a sharp cliff-edge that rewards complex estate planning over productive economic activity. As a result, people expend their resources hiring expensive advisers to create trusts, gifting strategies, and insurance wrappers. They do this not to create wealth, but to avoid a tax on wealth already created. This is a pure deadweight loss as it consumes resources with no real economic output to show for it.

This is precisely why we have Inheritance Tax relief for firms and agricultural assets. Policymakers recognise that a 40% charge on death would otherwise force the break-up or sale of family firms and farms to pay the tax bill. They recognise that this is a real economic cost.

However, those very same reliefs distort investment decisions in the other direction: money flows into AIM shares, farmland, or trading businesses partly because of their tax treatment rather than their underlying risk-adjusted return, thereby misallocating capital away from its most productive use. Moreover, economic theory also predicts, and there is emerging empirical support from Scandinavian administrative data, that inheritances and their tax treatment measurably affect recipients’ labour and savings decisions around the time of transfer, a distortion a genuinely neutral tax system would try to minimise.[3]

A levy on people who can’t afford the best advice

Now, if Inheritance Tax was an efficient tool for taxing the very wealthy, then perhaps an argument could be made that this cost might be worth bearing. However, the evidence suggests otherwise. Research from the Centre for the Analysis of Taxation found that a quarter of estates worth over £10 million pay an effective rate below 9%, and one in six pay less than 4% due to uncapped reliefs such as Business Relief and Agricultural Relief.[4] Meanwhile, families whose wealth is concentrated in an ordinary home have far fewer options to shelter it. HMRC data shows the tax is now increasingly falling on ‘asset-rich, cash-poor’ households as frozen thresholds and rising house prices pull more ordinary estates into scope, even as the largest, most liquid and best-advised estates continue to find routes around it.[5] A tax that the wealthiest can substantially avoid, while middle-income families increasingly cannot, is not doing the redistributive job usually claimed for it.

Inheritance Tax is now largely a levy on people who can’t afford the best advice.

Ten countries have already scrapped theirs

The UK is unusual not in having an inheritance tax, but in the severity of its combination of a high rate with a threshold that has been frozen since 2009.[6] Many comparable economies have abolished wealth-transfer taxes entirely. The OECD’s own review counts ten member countries that have scrapped estate or inheritance taxes, including Austria (2008), Norway (2014), and Sweden (2004), alongside earlier repeals in Australia, Canada and Israel.[7]

When the OECD asked member states why they repealed these taxes, the most commonly cited reasons were the ease with which sophisticated taxpayers avoid them, the administrative cost relative to revenue raised, and a lack of durable political support even among governments relatively supportive of wealth redistribution. Sweden’s case is particularly instructive: often seen as a high-tax, high-welfare-state economy, it concluded, by unanimous vote of its parliament, that its inheritance tax did more economic harm than the modest revenue it raised was worth, particularly through capital flight and pressure on family-owned businesses.[8]

The honest caveats

It should be pointed out at this stage that the Mirrlees Review favoured reforming the system rather than abolishing Inheritance Tax outright. It would also be incredibly unpopular with the Chancellor’s own backbenchers and so it is unlikely to happen. Moreover, it is important that any tax cuts are not unfunded and that any decision taken by the Chancellor must be fiscally responsible.

However, given how little Inheritance Tax raises relative to the administrative cost, the economic damage it causes, and its deep unpopularity with the public, it should be a prime contender for abolition by the Chancellor as part of a bold set of spending cuts and tax reform. Doing so would boost growth, help to repair the public finances, and give the new government a boost.