Inheritance Tax  

OECD calls for IHT hike to support Covid recovery

OECD calls for IHT hike to support Covid recovery

Countries should increase their rates of inheritance tax (IHT) and close loopholes used by the wealthy to avoid this tax, in order to support economies impacted by Covid-19, according to the Organisation for Economic Co-operation and Development (OECD).

In a report released yesterday (May 11), the body highlighted the high level of wealth concentration in many countries, with inheritances and gifts reported by the top 20 per cent of wealthiest households close to 50 times higher than those reported by the poorest 20 per cent.

It added that IHT can be an important instrument to address inequality, particularly when economies are under pressure, saying that the levy was easier to collect and generated lower efficiency costs than other taxes on the wealthy.

But the report also said inheritance tax reliefs should also be scaled back and the tax treatment of gifts and inheritances should be better aligned to prevent avoidance and evasion.

Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, said in the report: “While a majority of OECD countries levy inheritance and estate taxes, they play a more limited role than they could in raising revenue and addressing inequalities, because of the way they have been designed.

“There are strong arguments for making greater use of inheritance taxes, but better design will be needed if these taxes are to achieve their objectives.”

Last month, the International Monetary Fund proposed temporary tax hikes on corporations that prospered during the pandemic or the wealthy as a means to cover the cost of the coronavirus crisis and support more disadvantaged people.

Gordon Andrews, tax and financial planning expert at Quilter said the government should consider the impact of a raise in taxes before implementing anything.

“Before the government goes ahead and raises IHT rates, it may want to think about who it is that pays the most tax in the first place.

"Analysis of IHT rates paid by the Office of Tax Simplification shows the wealthy are able to pay less in inheritance tax due to being able to gift more away or have more intricate financial planning in place.”

Andrews added that this would mean a rise in tax would hit the middle earners - the cohort that the government is hoping will spend more in the medium term to help boost the economic recovery. 

“Upping the amount of tax they have to pay could end up having an adverse effect, so needs to be properly modelled.”

He added that inheritance tax might be the wrong levy to pursue in the first place. “While asset prices have risen, the tax take is still minute compared to other areas of personal finances, such as income tax. IHT brought in just £223m in 2019/20, so any further increases in rates are unlikely to make a huge difference to this.”

But Ed Smith, head of asset allocation research at Rathbones, said it was inevitable that taxes on the wealthy would rise relative to taxes on income.