Rishi Sunak considers cutting the U.K.’s ‘most unfair tax’

U.K. Prime Minister Rishi Sunak’s potential cuts on inheritance tax which could offer the most gains to Britain’s wealthiest 1%, according to a study by the Institute for Fiscal Studies. 

If Sunak’s Conservative Party moves to abolish the tax, it could cost the country £7 billion ($8.50 billion) in revenue, or about 0.3% of the U.K.’s GDP, a year.

But about half of the benefits of such cuts are forecasted to go to those with estates valued at £2.1 million ($2.55 million) or more, which represents only the top 1% of all estates, an IFS report published Wednesday found. 

The research institute also said that such an abolition of inheritance tax would also exacerbate inequalities in the U.K.

“While a reformed inheritance tax could do more to promote intergenerational mobility, big wealth inequalities by parental background already exist before inheritances are received,” the IFS report said.

The authors argue that inheritance has been growing in recent times—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 a part of lifetime economic resources, this inequality in future inheritances means that parental wealth is set to be a greater driver of lifetime income across younger generations,” the report said.

Proposed inheritance tax changes come ahead of the general elections slated for next year as Sunak’s party is finding ways to boost its support.

Many of Britain’s richest people have estates in constituencies that Conservative members of parliament hold, so a potential inheritance tax overhaul could shore up the party’s votes.

How important is the inheritance tax for the U.K.?

The U.K.’s inheritance tax has been divisive. It’s charged at 40% on assets valued at more than £325,000 ($395,000), with extra allowances on passing on a main home to heirs and some case-by-case exemptions. 

In its present form, this tax was only applied to under 4% of the U.K.’s deaths, according to government data from July.

As a result, revenues from the inheritance tax are also minuscule. But in about 10 years, IFS estimates the revenue will expand to over £15 billion ($18.23 billion), in today’s prices, double the collections made now.

Representatives at the British government also underscored the importance of the small, yet significant collection from the inheritance tax. 

“More than 93% of estates are forecast to have zero inheritance tax liability in the coming years—however, the tax raises more than £7 billion a year to help fund public services millions of us rely on daily,” a government spokesperson told Fortune in a statement. 

Talks on a possible change to the taxing on inheritance are set against a backdrop of persistently high but easing inflation and high-interest rates impacting British households.

These factors have also put pressure on public finances in the long run as government debt is tied to them. A reduction or abolition of the inheritance tax could further affect national spending.

The current regime, first introduced in 1986, was an effort to redistribute wealth in society by taxing the rich and directing that into benefits for those who are less well-off.

But over time, this system has earned 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 reliefs that typically “open up channels to avoid the tax” could help create a robust source of revenue for the government, raise up to £4.5 billion ($5.5 billion), IFS argued.

These funds could then be channeled into other public-sponsored programs or tax cuts in other areas.

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