Rachel Reeves “may be about to open Pandora’s box” by targeting inheritance tax reform in the upcoming Autumn Budget, Sad Rabbit Investments head of macroeconomics, Gabriel McKeown, has argued.
These comments follow reports of Reeves targeting IHT to address the £22bn “black hole” in the nation’s finances.
McKeown warned that historical data suggests a “complex relationship” between IHT receipts and economic growth, “making any reforms akin to ‘robbing Peter to pay Paul’.”
This data came from Newspage which found that GDP and IHT have an “inverse relationship”.
It explained that general trends show that GDP-to-IHT ratio has fallen steadily over the years, meaning that, as IHT receipts have gone up, the amount of output per £1 of inheritance taxed has reduced over the years.
Additionally, when IHT receipts dropped following the global financial crisis, the GDP-to-IHT ratio increased.
This suggests that taxing inheritance is an extremely inefficient way to grow the economy, as the amount of growth does not warrant the large amount taxed.
IHT receipts only seem to have grown larger, however, as in the period between April 2024 to July 2024, IHT receipts surged to £2.8bn, approximately £200mn higher than the same period last year.
McKeown additionally warned the impact on wealth inequality could be “disastrous”, as currently the wealthiest estates benefit “disproportionately” from exemptions and reliefs, making any reform ineffective as wealth disparities are already entrenched.
“While expanding IHT may seem like an attractive short-term solution, its historical inefficiencies suggest that broader tax reforms could offer more sustainable economic benefits,” he explained.
“Consequently, these reforms will be the real test of the government’s ability to navigate complex fiscal waters.”
A similar sentiment was shared by R3 Wealth independent financial adviser, Riz Malik, who stated: “Increasing inheritance tax will likely prompt more individuals to seek ways to structure their estates to minimise the tax burden.
“Similarly, any substantial hikes in capital gains tax could lead to people deferring their gains to reduce their tax liability.
“If the goal is to boost tax revenue, the chancellor may find it more effective to introduce smaller increases across several tax areas rather than making significant changes to just a few.”
Additionally, John Lamb Hill Oldridge director, Paula Steele, said: “IHT is increasingly paid by mid-level estates, as very large estates are able to plan and avoid the long-term impacts of IHT.
“If Reeves decides to follow through with an IHT hike, then the amount of wealth inherited by mid-level households will fall and reduce the UK’s wealth distribution.”
tom.dunstan@ft.com
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