Over the weekend, I ran a couple of blogs arguing that Inheritance tax cuts cannot be justified in the context of benefit cuts, but might be justified if part of a restructuring of taxes on pensions.
I argued that inheritance tax can be reshaped so that it is paid at a less penal rate by those who understandably feel they could be taxed twice on their wealth.
This could involve bringing pensions into the scope of IHT where pots are kept past state pension age.
I’m pleased to see that my idea is Paul Johnson’s idea, Mine is not a great mind (like his) but I’m pleased to see his team have put some research into the idea and have a better idea of the savings that could be created by bringing pension pots into scope of IHT
As my colleagues Arun Advani and David Sturrock have shown, simply capping reliefs for business and agricultural assets at a still-generous £500,000 and bringing pension pots into the scope of inheritance tax would allow him to cut the rate to 30 per cent on estates up to £2 million at essentially no cost. This would make the system both more equitable and more efficient, and comes for free.
Few other countries that try to run an inheritance tax system have the unlimited exemptions that we provide to a few of the extremely wealthy. That’s the way to pay for a cut in the headline rate of inheritance tax, not a cut to the benefits of the poorest.
Johnson , writing in the Times, plays down the impact of adjusting IHT, It will not create the social mobility claimed for its abolition by many on the right (including past prime ministers and chancellors). However, it is a tax that can be destructive to families and the fear of it preoccupies many more than will ever pay it. So adjusting the way it works could have social benefit.
Much more benefit could come out of changing the way we look at pensions, So long as the pension pot is promoted as an IGT mitigator, so long the basis of pension’s tax-privileged status is brought into disrepute.
Whether in the Autumn Statement or in the Spring Budget, I would be surprised if reform was not put on the table. I see it more likely to be introduced by a consultation than a section of a Finance Act, but it is an area of taxation that pleases nobody.
Typically good column from Paul Johnson around inheritance tax. I’ve always thought at a time when so many people don’t have enough money saved for retirement that pensions being usable as an IHT wheeze is odd.https://t.co/smxu103RS2
— George Nixon (@George_Nixon97) November 20, 2023