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Hunt urged to launch inheritance tax raid on unspent pension pots

Jeremy Hunt
Jeremy Hunt faces calls to simplify the tax system - MANDEL NGAN/AFP via Getty Images

Jeremy Hunt has been urged to demand inheritance tax on pension pots by one of Britain’s most influential economic think tanks.

The Institute for Fiscal Studies (IFS) has said the Chancellor could raise £1bn to £2bn in the coming decades by ending the tax-free passing on of unspent pension funds.

Experts at the IFS also urged Mr Hunt to scrap exemptions for the passing on of agricultural land.

David Sturrock, senior research economist, said: “Inheritance tax is littered with special reliefs and exemptions which make the tax unfair. 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.

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“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.”

Under existing rules, people with defined contribution pensions can bequeath any money left when they die without incurring an inheritance charge.

The think tank said this loophole encourages wealthy people to fund their retirement in other ways, and hoard their pension savings to avoid paying tax.

The argument comes in an analysis of inheritance tax reliefs for certain types of assets after the Chancellor in the Budget announced such exemptions would be expanded to agricultural land.

It follows repeated reports over the last year that the Treasury was thinking of abolishing or significantly reducing the tax.

Yet after several fiscal statements no such policy has yet emerged.

The IFS said that Mr Hunt could significantly lower the rate of inheritance tax or raise money for other spending by scrapping the exemptions and simplifying the system.

Shares in small and mid-sized growth companies listed on the London Stock Exchange’s AIM market also receive special treatment if held for two years before death.

Removing this exception would raise £1.6bn by the end of the decade, according to the IFS.

It also highlighted that capping the relief on the bequeathing of a family firm or agricultural land to £500,000 per person would raise £1.8bn by 2029-2030.

The complexity of the system means that despite the headline rate being 40pc, estates are often taxed far less.

On average, £10m estates face an effective tax rate of 17pc while those worth £2m are taxed more at 24pc, according to the IFS.

This partly reflects the fact that the wealthiest families can access the best tax advice, according to experts.

The Office of Tax Simplification a decade ago found that 88 types of reliefs to inheritance tax existed, making the system incredibly complex for families to navigate.

Arun Advani, associate professor at the University of Warwick, said: “Last year’s rumours of inheritance tax abolition were proved wrong. There was no big-bang change to the tax, but instead it looks to be facing death by a thousand cuts, as yet another relief was introduced. The top four reliefs alone reduce the tax take from inheritance tax by 38pc relative to if they were scrapped.”

Inheritance tax is one of Britain’s most disliked forms of taxation, with polling from YouGov showing a majority of the population find it unfair. This is despite the fact that only 5pc of estates were hit by it last year.