New figures out yesterday from HMRC showed the Treasury received £3.8bn in inheritance tax over the last year. If popular rhetoric were believed, this is proof of the taxman wrenching family homes from the children of the middle classes. But in reality only 3.1% of people left behind money and assets worth enough to attract a tax bill last year.  More important perhaps is just what £3.8bn can pay for. It’s enough, for example, to pay the salaries of 141,000 nurses, 124,000 teachers or 98,000 police officers.[1] That’s a lot of well-staffed hospitals, well-educated children and well-protected streets.

Of course, most taxes don’t work this way, channelling funds to very specific areas. But we should question what the consequences will be for public spending when the government acts to make more of the richest families’ wealth exempt from taxation.

That’s exactly what happened earlier this month when the Chancellor confirmed in the Summer Budget that there will be a new transferable nil-rate band, called a “family home allowance”, applicable when a main residence is passed on after death to a child or grandchild. It will rise in increments over the next few years, from £100,000 in 2017-18 to £175,000 in 2020-21. Combined with the existing nil-rate band of £325,000, that provides an individual allowance of half a million pounds. Spouses or civil partners can pass this allowance between them, effectively doubling the allowance to £1 million for a tiny minority of couples wealthy enough to worry about paying inheritance tax.

Even taking into account that the additional allowance is gradually withdrawn for estates worth over £2m, the changes mean we’ll lose £270m from the public coffers in 2017/18. To use the same examples used above, that’s the equivalent of our hospitals having to cope with nearly 10,000 fewer nurses, 7,000 fewer police officers on our streets, or classrooms getting even more crowded with nearly 9,000 fewer teachers. By 2020 it will be even worse, the loss to the public purse having risen to a dramatic £940m, which is nearly as much as the announced further cuts to social care for the elderly and disabled.

Raising the threshold is popular, partly because of the enduring perception of inheritance tax as a ‘death tax’. To try to counter this, there is a strong case for inheritance tax being levied on individual recipients rather than on the whole estate, to encourage the idea that people should pay a little bit into the shared pot when they are lucky enough to benefit from wealth they have not personally earned.  The media’s role in stoking a ‘death tax’ narrative means debates often lack the facts. When we look at the vital services inheritance tax helps pay for, and how few people are actually affected, it becomes much more difficult to argue that the government should forego so much of it.

Lucy Shaddock, Policy and Campaigns Officer

[1] Median gross annual pay for nurses (SOC 2231) £27,101; teaching professionals (SOC 2315) £30,751; police officers (sergeant and below, SOC 3312) £38,951. Annual Survey of Hours and Earnings, 2014.