Spending cuts and tax rises feared if inheritance tax is scrapped – think tank

Even opponents of inheritance tax think scrapping it would lead to “unacceptable trade-offs”, a think tank has said.

The Government is reportedly considering increasing the threshold at which estates pay inheritance tax as a precursor to abolishing the duty entirely following mounting pressure from senior Tories such as Liz Truss and Nadhim Zahawi.

Some Conservatives have claimed increasing the threshold or abolishing the tax could win the party the next election, but a report by think tank Demos published on Tuesday suggests even people who oppose inheritance tax are worried about the consequences of scrapping it.

The Demos study, which polled 2,000 people and carried out focus groups with more than 100 voters, found widespread agreement that abolishing inheritance tax “could cause unacceptable trade-offs”.

Participants repeatedly described the tax as a “necessary evil” that raised money for the Treasury, and feared getting rid of it would mean either other taxes would have to increase or spending on public services would have to be cut.

Dan Goss, one of the report’s authors, said: “We found that the public are worried that cutting inheritance tax, in today’s economic climate, would harm public finances and potentially mean cuts to public spending. This concern is felt even amongst those that are most against the idea of taxing inheritances.

“Policy makers must not take the public’s views for granted. They need to listen to the public in more depth to really understand the options available to them. This research challenges the idea that cutting IHT is an automatic vote winner – if politicians make the right case for it, the public will understand.”

The Office of Budget Responsibility forecasts that inheritance tax will raise £7.2 billion for the Treasury this year, more than the expected cost of extending free childcare over the next two years.

Mubin Haq, CEO of the abrdn Financial Fairness Trust, which supported Demos’s research, said: “The public are increasingly savvy that tax cuts come at a price. Whilst inheritance tax is far from popular, even many of its staunchest opponents are worried it could lead to either tax rises elsewhere or cuts to valuable public services, which have already faced years of severe under-funding.”

On Monday, the Prime Minister was silent on speculation that he was considering changes to inheritance tax, saying only that “the most important tax cut I can deliver for the British people is to halve inflation”.

But cabinet minister Grant Shapps described the duty as “punitive” and “deeply unfair”.

Inheritance tax is levied at 40%, but the vast majority of estates fall below the threshold – which can be up to £1 million for a couple – to incur the charge.