Kemi Badenoch is set to announce that the Tories will cut inheritance tax, a levy she has described as ‘immoral’. She’s wrong. In fact, it is cutting inheritance tax that is both economically and morally flawed.
That doesn’t mean the concept of inheritance is itself a bad thing: helping your children financially is a natural and admirable motivation. But as the great economist Adam Smith argued, some taxation on inheritance is justifiable: ‘Whatever part of his succession might come to such children would be a real addition to their fortune, and might therefore… be liable to some tax.’
In truth, people can and do give their children financial gifts tax-free at the moment. According to the IFS, over an eight-year period, some 30 per cent of in those in their twenties and early thirties received a substantial gift, overwhelmingly from their parents. The median gift amount is around £2,000, but those in the top decile receive on average over £20,000. These tax-free transfers happen when children need them the most: as a young adult, when they are getting on the job ladder, are getting married, or buying a house and having children. Even better, parents get to see their children enjoy these gifts while they are alive.
Taxable inheritance is different. On average, most people receive an inheritance in their early sixties. This means most inheritance goes towards a recipient’s own retirement. The biggest beneficiaries of taxable inheritance are currently babyboomers, the wealthiest generation that has ever lived.
The biggest beneficiaries of taxable inheritance are currently babyboomers, the wealthiest generation that has ever lived
Frankly, it is morally wrong to ask people who are currently working to pay more and more tax to fund our public services and service our national debt in order to cover costs largely consumed and caused by older generations. I don’t say this judgementally, but just as a matter of mathematical logic. As they have lived longer, older people have enjoyed more public entitlements and services than younger generations.
The Resolution Foundation recently found that a person born in 1956 is expected to withdraw, on average, 30 per cent more than they contributed to the public purse. Boomer prosperity has, in part, been built on public debt. They need to help pay it down. Paying a bit of tax on their inheritance is, bluntly, a small ask to ensure their children and grandchildren are not lumbered with debts that lead to poorer living standards and worse public services.
Cutting tax on work should be a priority instead, especially when the value of assets has exploded in recent decades and the value of labour has stagnated. Average household wealth rose by 20 per cent after inflation between the mid-noughties and the late 2010s, according to the ONS. Average real wages, meanwhile, only rose by 6 per cent between 2005 and 2025.
Inheritance tax is not double taxation, as is commonly but mistakenly argued. The executor (usually the recipients) pays inheritance tax based on the value of an estate. The economic burden of the tax then falls on the recipients. Whenever and whatever tax is applied, an individual somewhere loses money. A dead person cannot and does not lose money and pay tax. This means when recipients inherit, it is the first time they are taxed on the money they receive. Regardless, when a worker buys a good or service they usually pay VAT, and experience triple taxation, since they have already paid income tax and national insurance on that income from work.
Kemi Badenoch has rightly said, in her recent and impressive pamphlet ‘The Right Way’, that ‘where savings allow taxes to be cut, priority should generally go to taxes that do the most damage to work and investment.’ Cutting inheritance tax fails this test. There is evidence from the UK and the US that receiving a larger inheritance actually reduces work. And there is evidence showing that people who receive larger inheritances retire significantly earlier.
Any cut to inheritance tax now would benefit those receiving larger inheritances. Only one in 20 estates pay inheritance tax. Although the headline threshold for payment is £325,000, most estates benefit from allowances for homes and married couples, enabling £1 million to be passed on tax-free. On top of this, recipients of family businesses or farmland are – for frankly arbitrary reasons – still entitled to much higher allowances for tax-free inheritance, despite the Labour government’s reductions of these entitlements. The Conservatives have committed to reinstating these reliefs in full, despite arguing in ‘The Right Way’that: ‘A simpler system in which tax is reliably collected in fairer to honest taxpayers than high nominal rates riddled with exceptions and avoidance opportunities.’
Instead of focusing its efforts on reversing, at least in part, the Labour government’s damaging rise in employer’s national insurance, the Conservatives are still in their comfort zone. They have prioritised cuts to stamp duty, VAT on private school fees and inheritance tax – which disproportionally benefit upper-middle class families. But evidence from the OECD shows that transaction and property taxes are much less damaging to economic growth than business taxes on payroll or profits.
Any right-headed parent teaches their children that they must keep working hard for a successful life. Unfortunately, inheritance is becoming a much bigger contributor towards someone’s lifetime income. If we really want a society where aspiration and hard work is the route to riches, then we need meritocracy, not an inheritocracy.
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