Inverse relationship between GDP and IHT receipts means higher IHT could hurt economic growth
Amongst the list of areas in which new Chancellor Rachel Reeves is looking to launch a tax attack on, inheritance tax (IHT) looks to be one of her main targets. The Chancellor disclosed that there’s a £22bn “black hole” in the nation’s finances and is looking for ways to shore up funds via tax revenues to fill the gap. However, questions remain as to whether taxing inheritance has brought about any growth to begin with.
Research from Newspage found that GDP (output) and IHT have an inverse relationship. The general trends show that the GDP-to-IHT ratio has fallen steadily over the years. In other words, as inheritance tax receipts have gone up, the amount of output per £1 of inheritance taxed has reduced over the years.
Nonetheless, what’s more interesting, is that when IHT receipts dropped following the global financial crisis, the GDP-to-IHT ratio increased. This suggests that taxing inheritance is an extremely inefficient way to grow the economy, as the amount of growth doesn’t warrant the large amount taxed.
IHT receipts only seem to have grown larger, however. In the period between April 2024 to July 2024, IHT receipts have surged to £2.8bn, approximately £200m higher than the same period last year.
But with Reeves looking to potentially include pensions in the scope of inheritance tax, many people who previously would not have faced such a liability may suddenly find themselves with a serious inheritance tax problem.
Newspage asked economists, IFAs, and experts for their views on whether the trends shown can be attributed to other economic factors, how changes to IFT could affect wealth distribution and economic growth, and alternative tax structures.