British Prime Minister Rishi Sunak’s possible inheritance tax cuts, which could yield the biggest gains for Britain’s richest 1%, according to a study by the Institute for Fiscal Studies.
If Sunak’s Conservative Party were to move to abolish the tax, it could cost the country £7 billion ($8.50 billion) in revenue, or about 0.3% of Britain’s GDP, per year.
But around half the benefits of such cuts are expected to go to people with estates worth £2.1 million ($2.55 million) or more, representing just the top 1% of all estates, a report showed on Wednesday published IFS report.
The research institute also said that such an abolition of inheritance tax would also increase inequality in Britain
“While a reformed inheritance tax could do more to promote intergenerational mobility, large inequalities in wealth by parental background already exist before inheritances are received,” the IFS report said.
The authors argue that inheritance has increased recently – and as that growth is set to continue, younger generations are expected to acquire larger sums from their ancestors.
“Together with the growing importance of inheritance as part of economic resources across the lifespan, this disparity in future inheritances means that parental wealth will be a greater driver of lifetime income for younger generations,” the report said.
Proposed changes to inheritance tax come ahead of next year’s general election, as Sunak’s party finds ways to boost its support.
Many of Britain’s richest people have estates in constituencies owned by Conservative MPs, so a possible overhaul of inheritance tax could boost the party’s votes.
How important is inheritance tax to Britain?
Britain’s inheritance tax is divisive. 40% is charged on assets worth more than £325,000 ($395,000), with additional charges for passing a main residence to heirs and some exemptions on a case-by-case basis.
In its current form, the tax was only applied to less than 4% of UK deaths, according to government data from July.
As a result, the proceeds from inheritance tax are also minuscule. But in about a decade, IFS estimates that revenues will increase to more than £15 billion (€18.23 billion), at current prices, double the collections now collected.
Representatives of the British government also underlined the importance of the small but significant inheritance tax collection.
“It is expected that more than 93% of estates will not have to pay inheritance tax in the coming years. However, the tax raises more than £7 billion a year to help fund the public services that millions of us rely on every day,” a government spokesperson said. Fortune in a statement.
Discussions about a possible change to inheritance tax come against a backdrop of persistently high but declining inflation and high interest rates impacting British households.
These factors have also put pressure on public finances in the longer term, because the national debt is tied to them. A reduction or elimination of inheritance taxes could further impact national spending.
The current regime, first introduced in 1986, was an attempt to redistribute wealth in society by taxing the rich and turning that into benefits for those who are less well off.
But over time, this system has developed a reputation for being easy to circumvent and has consistently been one of the most “unfair taxes” in the country.
Reforms to the system, such as placing a cap on certain exemptions that typically ‘open channels for tax avoidance’, could help create a robust source of revenue for the government, amounting to up to £4.5 billion ($5,000) 5 billion) could yield, IFS argued.
These funds could then be funneled into other government-sponsored programs or tax cuts in other areas.