Additional revenue could be raised by the government through closing inheritance tax loopholes, according to the Institute for Fiscal Studies.
In the Budget, chancellor Jeremy Hunt introduced an inheritance tax relief which meant agricultural relief would be extended to include environmental land management.
As a result, landowners will be able to pass on any amount of ‘agricultural land’ tax-free even in some cases where it is not being used for agriculture.
The IFS said while the expansion of the relief is so small, it illustrates a key economic and political problem with an inheritance tax that gives “special treatment to some assets”.
David Sturrock, senior researcher at the IFS said: “Inheritance tax is littered with special reliefs and exemptions which make the tax unfair. The Budget introduced yet another relief to this long list.
"Rather than gradually carving out more and more assets from the tax, the government should take steps to reduce or eliminate some of the major exemptions in the system.
“Eliminating the special treatment given to some shares, capping reliefs for business and agricultural assets, and bringing pension pots into the scope of the tax would make the system fairer and raise revenues.”
Potential reforms
The IFS said there are several reforms that could be enacted that would move towards closing the loopholes to raise revenues.
This revenue could then be used to reduce the main rate of inheritance tax or fund other tax and spending priorities.
Reforms include removing special treatment of alternative investment market shares, capping agricultural and business reliefs and ending the tax-free passing on of pension pots.
According to the IFS, including the value of defined contribution pension pots in estate would raise around £200mn in the present tax year, rising to £400mn in 2029-30.
Due to pots becoming more prevalent and larger in size over time, the revenue gain from bringing them into the scope of inheritance tax is set to rise, the IFS said.
Mubin Haq, chief executive of Abrdn Financial Fairness Trust, said: “A key factor undermining support for taxes is the public perception that there are loopholes a small minority are taking advantage of.
“That’s the situation facing inheritance tax, with a myriad of reliefs available. Clamping down on a few of the main exemptions could increase the amount raised through inheritance tax by over one-fifth.
"That’s more than £2bn additional revenue by the end of the decade, which could fund our overstretched public services.”
The additional revenue generated is on a similar scale to the amount of money the government has proposed to raise by scrapping the non-dom regime or about a third of the size of increasing the main national insurance contributions rate by one percentage point.
The IFS has said existing reliefs encourage “inefficient investment, distorting economic decision-making” and said this was why there were calls to expand agricultural relief to land management because “tax drives choices”.
