The wealthiest 1% of the UK would receive half the benefit if the Government was to scrap inheritance tax (IHT), with an average tax cut of over £1m, new analysis has indicated.

Research by the Institute for Fiscal Studies (IFS) has suggested that growth in IHT revenues could be much stronger than some official forecasts, with revenues increasing from around £7bn in the current year to around £15bn in a decade’s time.

The IFS has warned, however, that scrapping the tax would therefore come with a fiscal cost that “grows over time”.

According to the think tank, if IHT is to be retained then the system needs to be improved “urgently”. The IFS suggested the current system suffers from several problems which are “costly, inequitable and inefficient”, problems that also become more prevalent as inheritances continue to grow in the UK’s ageing population.

The current cost of abolishing IHT would be £7bn, the IFS has estimated. Around half (47%) of the benefit would go to those with estates of £2.1m or more at death, who make up the top 1% of estates in the UK and would benefit from an average tax cut of around £1.1m. The estimated 90% of estates not paying IHT would not be directly affected by such a reform.

IHT reforms that remove poorly justified reliefs could raise up to £4.5bn, the IFS analysis has also forecast, though this amount would be reduced if the wealthy responded by reducing the size of their estates.

Senior research economist at IFS, David Sturrock, said there are reasonable arguments for and against IHT.

“But as inheritances grow in size, it’s increasingly important that we address problems in the current system,” Sturrock commented.

“The Government should abolish the special treatment given to business assets, certain types of shares, agricultural assets, pensions and homes passed to direct descendants. These exemptions and reliefs open up channels to avoid inheritance tax. This is costly, unfair and distorts economic decisions. Reforming them could raise as much as £4.5bn in additional revenue.”

Director of welfare at the Nuffield Foundation, Mark Franks, added: “IHT is paid after death and by only a small proportion of the population, who are largely the wealthiest members of society. Like all taxes, it supports vital public services.

“Abolishing it or scaling it back would mean either cutting such services, raising other taxes or increasing the national debt. Yet, the current design of inheritance tax compromises both confidence in it and its ability to generate revenue effectively. Through practical reforms, it is possible to craft a more just and efficient system.”

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