Why Labour’s inheritance tax raid would be a disaster for Britain

There are a number of policy changes Labour could make to widen the net even further. 

Julia Rosenbloom, of law firm Shakespeare Martineau, said that the party’s silence on death duties suggested these policies were “unlikely to be crowd pleasers”. 

For example, Labour could choose to scrap some of the tax reliefs on lifetime gifts, preventing people from giving away their wealth earlier without incurring a charge. 

“Currently, there is no tax on gifts as long as the person gifting survives the transaction by seven years,” Ms Rosenbloom said. “With neighbouring countries in Europe already implementing a ‘gift tax’ it is possible the UK could follow suit.” 

Alternatively, Labour could impose an inheritance tax raid on family homes by scrapping the residence nil-rate band. 

This extra £175,000 allowance lets homeowners pass on £500,000 tax-free to their families – or £1m if they are a couple – provided their children or grandchildren inherit their main property. 

Andy Butcher, of wealth manager Raymond James, said cutting this exemption would be “a further blow to families”, especially where the bulk of their wealth is in their home. 

“This will again catch those that may not consider themselves the wealthiest in society, and likely the same families that have been squeezed so much by the Tory Government the past few years. This wouldn’t impact the very wealthiest in society.”

Mr Hollands said another concern is whether Labour would make pension pots part of an estate for inheritance tax purposes. Today, pensions can be inherited free from the contentious levy. 

The economic cost of death duties 

At 40pc, Britain’s inheritance tax rate is one of the highest in the Organisation for Economic Cooperation and Development (OECD). 

The Centre for Policy Studies, a think tank, has called the levy “an inefficient tax which penalises work, savings, investment and capital accumulation, distorting behaviour with potentially significant aggregate economic consequences over time”. 

Inheritance tax can be very painful for families – and yet the benefits for the public purse are surprisingly small. 

Research by the OECD has found that inheritance tax generates relatively little revenue. 

On average, it accounts for just 0.5pc of total tax take in countries that levy it. In fact, it exceeds 1pc of total taxation in only four OECD countries – Belgium, France, Japan and Korea. 

It is generally easier for the ultra-wealthy to take advantage of tax reliefs and also move to lower-tax countries. This means families whose wealth is tied up in the home are often the hardest hit. 

In recent decades, several countries repealed their inheritance tax for this reason and also over fears the levy would drive away wealthy business owners. 

The most obvious example is Sweden, who abolished its inheritance tax in 2004 following an exodus of the wealthy from the country. 

Business owners including TetraPak founder Ruben Rausing, Ikea founder Ingvar Kamprad and industrialist Fredrik Lundberg all fled because of the punitive tax policy.