IEA Report Demands Labour Scrap 'Arbitrary' Inheritance Tax System
The UK government is facing mounting pressure to abolish the inheritance tax system, with warnings that it positions Britain as a high-tax outlier among developed nations. A new report from the Institute of Economic Affairs (IEA) argues the tax stifles investment and risks driving entrepreneurs abroad, urging Labour to take decisive action.
UK Stands Alone in High Inheritance Taxation
The IEA report reveals that nearly half of the 38 OECD countries do not tax bequests to adult children, placing the UK in a small group of high-taxing nations for family succession. The UK's inheritance tax (IHT) imposes a 40 per cent levy on estate values exceeding a standard threshold of £325,000, which can increase to £500,000 if a main residence is passed to children.
Lord Frost, director general of the IEA, stated: "A nation serious about growth and about giving families the freedom to build something lasting, would not levy a 40 per cent charge on wealth that has already been taxed." He emphasized that a government focused on boosting growth and supporting families should consider abolishing the tax entirely.
Inheritance Tax Called 'Distortionary' Economic Burden
The report describes inheritance tax as a distortionary weight on the economy, characterizing it as an arbitrary extra hit on a value chain already impacted by income tax, national insurance, and VAT. Rory Meakin, author of the report, explained: "Inheritance tax is arbitrary, complex, distortionary and drives away the entrepreneurs Britain needs."
Meakin added that while abolition should be the ultimate goal, even hesitant governments could implement meaningful reforms such as raising thresholds, cutting rates, or simplifying gifting rules.
Government's Recent Tax Controversies
This call for reform comes after the government spent the last year battling backlash from the farming community following its contentious move to scrap tax breaks for family farms in the 2024 Autumn Budget. The decision sparked over a year of nationwide protests, eventually forcing a U-turn in December last year where the government more than doubled the tax-free threshold for agricultural assets to £2.5 million.
The IEA brands inheritance tax a massive deadweight cost to the economy, noting that the government spends £66 million annually just to collect it while families navigate complex red tape. The report concludes that a good tax system would not include inheritance tax, urging the Labour government to prioritize its abolition for economic competitiveness and fairness.
