Make inheritance tax work better by cutting it to 20%

What does the Chancellor mean when he says he wants to simplify inheritance tax?

You might optimistically think that Philip Hammond wants to hack back restrictions and make it easier to pass on more after your death tax-free.

But you could also be forgiven a sneaking suspicion that this is a Trojan horse, where the real aim is to rake in more tax.

Whatever his real motivation, Hammond had a point in his letter to the Office of Tax Simplification asking it to put inheritance tax under review – it has a stupidly complicated set of rules and reliefs.

So, if the Chancellor really wants to simplify IHT, here is an idea: get rid of all the fiddly reliefs, keep a tax-free threshold and cut inheritance tax to a flat 20 per cent above it.

I believe this has two major merits.

Firstly, it creates far less incentive for those in the multi-million pound and above bracket to indulge in measures to avoid IHT, as a 20 per cent tax cut from an estate is far more palatable than a 40 per cent one.

Secondly, it could solve the curious problem of inheritance tax – it is widely disliked even though not many people pay it.

To economists and policymakers this is a bit of a conundrum, why do people whose families won’t be hit by a tax find it so distasteful?

My answer is drawn from our tendency to irrational thinking, as exposed by the world of behavioural economics: people don’t like inheritance tax because 40 per cent is almost half.

Your estate may never big enough to incur IHT, but it doesn’t take much to imagine such a large chunk of your lifetime wealth being taken away from your children or grandchildren and think ‘that seems unfair’.

Dial the tax down to 20 per cent and that emotional reaction drifts away.

The huge rise in house prices over the past four decades has dragged many more people into the inheritance tax net, with ordinary homes in  expensive areas hit

And my 20 per cent plan is also simple. 

Standing in distinct contrast with the current system, whereby the nil rate band tax-free threshold is the only simple element, beyond which you start get relief piled on relief – ranging from weddings to owning farmland and forests.

Some are also hopelessly outdated, you can only give away £3,000 a year or pay £5,000 for a wedding – so don’t pay university fees, help your kids buy a £7,000 car, or fund their £10,000 wedding and then have the misfortune to die within seven years.

To add to this, in his wisdom, former Chancellor George Osborne ducked a promise to raise the threshold to £1million and instead loaded a bizarre own home allowance on top.

To add extra spice, this main residence nil rate band can only be used for direct descendants and starts getting taken away again above £2million.

Yes, we need money coming in to pay for Britain’s commitments – including the extra £20billion we should spend on the NHS, but it makes absolute sense to revise this overly-complicated tax before we end up further entangled in its net.