Inheritance tax should be increased for the very rich to pay for cuts for those who are only just liable for it, according to proposals published on Sunday by a leading left-of-centre think-tank.
The Institute for Public Policy Research, whose former director is now a senior policy official in Downing Street, suggested introducing variable rates to replace the single 40 per cent rate currently in force.
The IPPR's proposal follows concerns about the rising inequality of wealth in the UK and complaints that rapid increases in house prices are pushing a higher proportion of families over the tax-free threshold.
Only about 4 per cent of estates left by the deceased are subject to the tax at present. The tax, which is believed to have raised about ?2.5bn in the past tax year, applies to inheritances above ?263,000 after allowing for debts and funeral expenses. It excludes family-owned businesses and inheritances by a surviving spouse.
The proposal would mimic income tax and make the system more progressive by introducing a range of increasing marginal rates. The rate on the first ?25,000 over the tax-free allowance would be cut to 22 per cent, with the top rate raised to 50 per cent for that part of taxable inheritances more than ?500,000 above the tax-free allowance.
The IPPR said this would raise an extra ?147m in revenue, which it proposed spending on the Child Trust Fund, which creates "baby bond" accounts for children at birth. The proposal would reduce inheritance tax for 87 per cent of eligible estates while increasing it for a minority of very rich families, it said.
A Downing Street spokesman declined to comment yesterday on speculation that the proposal would be adopted as government policy, noting that it had had nothing to do with the development of the IPPR's proposal. The Treasury said there was no active review of inheritance tax at present.
Estate taxes are a highly charged political issue in the US, where the administration of President George W. Bush has secured a temporary repeal of a US version of the tax and is attempting to abolish it.
The Conservatives have recently criticised the government over the inheritance tax, noting that the rise in house prices above inflation has made more estates eligible for the duty.
The IPPR said inheritance tax should be retained to take the strain off more damaging taxes such as income and value-added tax, which it said had bigger disincentive effects on working.
