Abolishing inheritance tax would help reduce wealth inequality by serving as a crucial equalising measure and source of start-up funding that disproportionately benefits lower-wealth households and middle-class families, says Max Young

The Chancellor did not abolish Inheritance Tax at the Budget, nor did he lower it. He should know for next time that such a policy would not only provide “growth in every postcode” but would actually reduce inequality in Britain. How so? 

A landmark 2021 report by the OECD found that “While lower-wealth households receive smaller inheritances and gifts, these are typically large as a share of net wealth.” It added “even a small inheritance can be substantial relative to pre-inheritance wealth.” 

In the 12 countries examined by the organisation, the second-poorest fifth of households benefited more from their inheritance than the richest fifth. In Spain, 95.6 per cent of the net wealth of the second fifth derived from bequests. 

In short, the poorer you are, the more important the money your parents pass down to you is. In many cases it will be the only cash injection you ever receive. 

Richer heirs tend already to own wealth before their parents die. That means inheritances are actually a crucial equalising measure. The evidence bears this out. 

An 2016 study by the Institute for Fiscal Studies noted that inheritances in Britain “act to make the distribution of non-pension wealth less unequal.” 

In Denmark, tax record research found that bequests cut the share of wealth held by the top one per cent by around six percentage points. 

In an analysis of the whole Swedish population’s tax records, inheritances were found to reduce the Gini coefficient, the formula by which relative wealth inequality is measured, by five to ten per cent. 

The Swedes abolished their tax on inheritances thanks to the fact it had an outsized effect on middle earning families, who paid an effective rate of 5.4 per cent in 2004, up from 2.9 per cent in 1992. The left-wing Social Democratic government scrapped it with the support of two-thirds of Swedes. 

In Britain, Inheritance Tax hits the middle class the hardest too – HMRC data shows families with estates worth between £2m and £7.5m are hit with an IHT bill of more than 25 per cent, a share which drops for wealthier estates. 

The 10 countries that have scrapped inheritance tax

Ten OECD countries have scrapped inheritance taxes: Mexico (1961), Canada (1972), Australia (1979), Israel (1980), New Zealand (1992), Sweden and Slovakia (2004), Austria (2008), the Czech Republic and Norway (2014). There’s a hint for Healey in there somewhere.

Bequests are a source of crucial start-up funding. A recent survey by Charles Stanley found that 20 per cent of business owners used an inheritance to start their firm, only one point behind bank funding. Some 15 per cent of owners used inheritance cash to fund a later expansion of their business. 

A 2018 study which examined US data from 1992 to 2010 found that receiving any inheritance increases your chances of owning and running a business by almost 13 per cent. The size mattered comparatively little, too. Each extra $1m bequeathed added only one per cent to that probability. 

Who benefits most? Banks like to lend against a house or significant savings. Those who have neither rely especially on what their parents leave behind for them. 

Instead of winding down the tax the British government is expanding it. Unspent pension pots will join the estate from April 2027, too. The Office for Budget Responsibility predicts that more than 10 per cent of British estates will pay Inheritance Tax in three years, thanks to the allowance threshold having been frozen since 2009. It should be more than £540,000 today. 

Inheritance tax is one of the levies most hated by the British public, because it punishes aspiration and inhibits the basic human desire to provide for one’s children and leave a legacy. It is also helping to keep the poor in relative poverty. Any progressive campaigner worth their salt should campaign for its abolition.