Living in a country with 100 per cent inheritance tax is a good thought experiment - Hilary Salt

From a fairness perspective, that seems very appealing - the end of trust fund kids and of inherited power and wealth – levelling up (down?) in action. But a 100 per cent inheritance tax (IHT) would mean a race to give money away before you die – potentially leaving you with insufficient assets to support yourself.

And would it not in any case just mean governments switching to a gift tax not an inheritance tax? And isn’t it a perfectly natural parental instinct to use your hard-earned accumulated assets to provide a comfortable start for your kids?

Set within that context, the current UK system of inheritance tax doesn’t feel unreasonable. A 40 per cent tax on assets over £325,000 (about eight and a half times National Average Earnings), with additional (complicated) allowances for homes, businesses and farming. And no tax paid between married couples or civil partners.

Based on that description, it’s perhaps surprising that in 2022/3, IHT raised only around £7.5billion - less than one per cent of the total tax take. Around one in 20 estates was affected by inheritance tax.

There’s a widespread - and justified - belief that the very wealthy manage to avoid IHT by sophisticated tax planning. Money given away during your lifetime isn’t subject to IHT if you live for at least seven years – and those with sufficient wealth can afford to give generously.

And many of the wealthiest people avoid IHT altogether by placing assets in trust to pass on to the next generation. Business relief is also a big loophole - costing £1.3billion with just four per cent of eligible businesses eating up more than half of that cost.

If Rachel Reeves is looking to IHT to raise revenue the Government needs to fund their growth plans, part of the job must surely be to make sure the tax burden is borne by the richest rather than those who can’t undertake the tax planning necessary to avoid it.

Options could be to extend the seven year period beyond which gifts escape IHT, or perhaps better to have a tax that applies overall to both gifts given during life and legacies left at death.

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The other glaring inconsistency in IHT is the treatment of pots of money held in Defined Contribution pension plans. These amounts are not subject to inheritance tax on death.

If a member dies before age 75, the amount in the pot can be passed on to those who inherit it with no tax at all to pay – despite that fact that the pot benefitted from generous tax reliefs during the saver’s lifetime. If the member dies after 75, there is still no inheritance tax but the amounts are subject to income tax in the hands of those drawing money out.

Introducing IHT on these pots could raise £400million per year - not a huge sum but it would make taxation more consistent.

It cannot be right that people save in a DC pension to provide a pool of assets to support them in retirement but find that when they reach retirement, their financial advisor tells them that their pension assets are the very last assets they should touch because they can be passed on free of IHT. The whole point of a pension plan is to provide an income for the living not a legacy for the dead.

In my view, taking the opportunity to tidy up inheritance tax and make it fairer and more consistent would be a good way for Chancellor Reeves to raise money to fund the Government's growth plans. Will she or won’t she?