Rishi Sunak is reportedly contemplating a reduction in inheritance tax as part of his strategy to win over voters and differentiate the Conservative Party from the leading Labour Party in the polls.
These plans could potentially pave the way for the eventual elimination of the inheritance tax altogether, as reported by the Sunday Times. However, officials at Downing Street have attempted to downplay any speculation that the Prime Minister is actively developing tax-cutting plans.
Currently, inheritance tax in the UK stands at a rate of 40% for estates exceeding £325,000 in value, with an additional £175,000 allowance for the main residence if it is passed on to children or grandchildren. Married couples can combine their allowances, enabling them to transfer up to £1 million to their descendants without incurring any tax liability. The Sunday Times references three sources who claim that there is an ongoing high-level discussion within the government regarding potential changes to this tax.
Among the proposals being considered is the possibility of Sunak reducing the 40% rate in the upcoming March budget, potentially setting the stage for its complete abolition in the coming years.
A senior government source said:
“No 10 political advisers have been looking at abolishing inheritance tax as something that might go in the manifesto. It’s not something we can afford to do yet.”
Official figures for the 2020-21 tax year revealed that only 3.73% of UK deaths resulted in an inheritance tax obligation.
In response to these developments, Labour MP and Shadow Chief Secretary to the Treasury, Darren Jones, criticized the potential move, arguing that it represents an unfunded tax cut of £7.2 billion annually, benefiting a mere 4% of the population, and labeling it a significant threat to the economy.
Downing Street sources have emphasized that there are no concrete plans being drafted and have referred to Chancellor Jeremy Hunt’s assertion that tax cuts are currently “virtually impossible” given the state of the public finances.
It has also been reported that Sunak intends to uphold the pension “triple lock” as he prepares for the next election. This policy ensures that pensions increase each April by whichever is the highest among three factors: average wage growth, inflation, or a fixed 2.5% rate.