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The analysis follows calls from Conservative MPs to abolish the primary tax on inherited wealth. Unseen Studio/

According to an analysis by the Institute for Fiscal Studies, eliminating inheritance tax by 2032 would result in a yearly loss of nearly £15 billion in government revenue. This comes in response to calls from Conservative MPs to abolish the primary tax on inherited wealth.

The think tank's report highlights that in the tax year 2020-21, less than four per cent of estates paid inheritance tax (IHT). However, due to the substantial growth in wealth among older individuals, this percentage is expected to increase to over seven per cent in the next decade.

While London has the highest number of estates subject to the tax, areas such as Sussex, the Cotswolds and the vicinity of Birmingham will have the highest number of taxable estates per 100,000 residences.

The IFS report, titled 'Reforming Inheritance Tax', reveals that in 2024, the wealthiest fifth of donors will bequeath an average of £380,000 per child, resulting in an inheritance tax payment of approximately 10 per cent of this amount.

In contrast, the least wealthy fifth of parents will leave less than £2,000 per child. The authors estimate that if the total amount of inherited wealth were evenly distributed among all 25-year-olds next year, each would receive approximately £120,000.

Rishi Sunak is reportedly considering a reduction in inheritance tax as part of his efforts to attract voters and create clear distinctions from the Labour Party. While Downing Street has downplayed speculation that the Prime Minister is drafting plans to abolish the tax entirely, calls for reforms that enable households to pass on more assets are gaining traction within the Conservative party.

Nadhim Zahawi, a former Chancellor, has labelled inheritance tax as "morally wrong" and a "spectre that haunts us alongside death". Anthony Browne, Tory MP for South Cambridgeshire, expressed concerns that without reform, many middle-income households would bear substantial tax burdens while the super-wealthy would continue to utilise trusts and other loopholes to avoid paying.

Currently, inheritance tax is levied at a rate of 40 per cent on wealth exceeding £325,000, with an additional £175,000 allowance for primary residences passed on to children or grandchildren. Spouses can also share their allowances, resulting in a combined allowance of £1 million for married couples, allowing them to transfer a seven-figure sum tax-free.

Among the proposals being considered by Sunak is a reduction in the 40 per cent tax rate, potentially paving the way for its eventual abolition in the years to come.

The IFS report indicates that the immediate cost of abolishing IHT this year would be £7 billion, with approximately 47 per cent of the benefits going to estates worth £2.1 million or more at the time of death. These top one per cent of estates would see an estimated average tax reduction of £1.1 million.

A Treasury spokesperson commented: "More than 93 per cent of estates are forecast to have zero inheritance tax liability in the coming years; however, the tax raises more than £7 billion a year to help fund public services millions of us rely on daily."

In their report, authors Arun Advani, a tax specialist from the University of Warwick and IFS researcher David Sturrock recommend initial reforms to prevent the super-wealthy from exploiting loopholes for the benefit of their descendants. They propose ending exemptions valued at £4.5 billion a year for those inheriting businesses and farms.

Eliminating business relief alone could raise the threshold to £500,000, and further reductions in farm relief could raise it to £525,000. These reforms, they argue, would allow for a reduction in the tax rate from 40 per cent to 25 per cent while maintaining revenue neutrality.

Furthermore, the report noted: "Taking a longer-term view, the rapid growth of wealth compared with earnings over the past several decades has brought with it questions about the balance of taxation across generations and the growing role of parental wealth transfers in driving differences in life outcomes within today's working-age generations."

"Inheritances have grown and are expected to continue to grow, faster than earnings, meaning that they are projected to have a growing negative impact on intergenerational mobility," the report concluded.