Market News

BY  Alex Wickham, Bloomberg News

(Bloomberg) -- Rishi Sunak is considering cutting the UK’s unpopular inheritance tax ahead of the next general election, people familiar with the matter said, a move senior Conservatives think will give his ruling party a major boost as it tries to overcome a double-digit deficit in opinion polls.

Sunak was privately keen on the idea when he was Chancellor of the Exchequer under Boris Johnson, and while the economic picture has changed dramatically since, a pre-election giveaway remains a live option. That’s according to two current ministers who also served under Johnson, speaking on condition of anonymity because the policy proposals are not yet public.

With a national vote due by January 2025 but likely earlier, Sunak is under growing pressure from his party to reduce a tax burden that has risen to a postwar high — despite repeatedly calling himself a “low-tax Conservative.” Tories fear a backlash as voters endure a record squeeze in living standards.

Bloomberg has previously reported Sunak is planning pre-election tax cuts, including possibly to income tax, if inflation dips below 3% this year. Sunak told the ConservativeHome website this week he wants to cut taxes, but only once he has a handle on inflation — which is running north of 10% — and borrowing.

Asked about an inheritance tax cut, a government spokesperson declined to comment on future tax policy, saying Sunak’s priority is to cut inflation. Another official said it was too early to comment, as work on Chancellor of the Exchequer Jeremy Hunt’s fiscal statement due in the fall hasn’t yet begun.

Still, there’s a clear rationale for Sunak to do so. Inheritance tax receipts are skewed toward wealthier households in the Conservative’s southern England stronghold, so reducing what some describe as a death duty could help shore up the base. Stopping that so-called blue wall demographic — typically middle-class or wealthy property owners, some of whom consider themselves asset-rich but cash-poor — voting for the centrist Liberal Democrats is a key Tory priority.

It could also drive a wedge between the Conservatives and the poll-leading opposition Labour Party, who are unlikely to match a tax cut that some supporters will see as regressive and benefiting better-off Britons. A similar political dynamic played out when Hunt scrapped the lifetime allowance on pension contributions, which Labour criticized as a sop to the rich.

Yet polling suggests a cut would be broadly popular. According to an October YouGov survey commissioned by law firm Kingsley Napley, 63% of respondents said they support increasing the £325,000 ($405,000) threshold at which the tax starts to be paid, a number that rose to to 77% among Conservative voters. Some 48% of Britons would back abolishing the tax altogether, the data indicated.

Cutting the tax could be a game-changer as the Tories try to whittle down Labour’s lead, said one of the ministers, who wants Sunak to announce it at the Conservative Party’s annual conference in October.

One option under consideration is reducing the headline 40% rate, a person familiar with the matter said. Another would be to increase the threshold at which the tax starts to be paid, the so-called nil-rate, or raise the additional £175,000 “residence nil-rate band” that applies to properties handed down to direct descendants. No decision had been made, the person said.

There is increasingly fevered speculation about when Sunak will call an election. Hunt hinted in an interview with Bloomberg TV this week that improving economic data could pave the way for a poll in Spring 2024, while the Times newspaper reported that Sunak was considering the fall of next year.

That has made Tory MPs restless for tax cuts, even as Sunak and Hunt say they have to repair the public finances and tell the party that voters will reward a sensible approach. In that sense, cutting inheritance tax would fit the bill. According to the Office for Budget Responsibility, the levy is expected to apply this year to 39,000 deaths, or 5.8% of the projected total. That would raise just over £7 billion for the Treasury, or just under 1% of all tax revenue.

It would not be the first time the Conservatives have promised to cut inheritance tax before an election campaign. In 2015, then Chancellor of the Exchequer George Osborne told voters he would exempt family homes worth as much as £1 million from the tax. Back in 2007, when the Tories were in opposition, Osborne pledged that only millionaires would pay the levy.

The Tories blamed their Liberal Democrat coalition partners for preventing Osborne’s plan when they came to power in 2010. After the general election in 2015, the Tories did introduce the “residence nil-rate band.” Osborne left office after the Brexit vote the following year.

Sunak has long indicated he sees more cuts are needed. In the Tory leadership contest he lost to Liz Truss last summer, he said tackling inheritance tax as supporting someone’s “aspiration.”

“If they want to build something and leave that for their family, that’s an entirely Conservative instinct and a government that I’m privileged to lead would very much want to support that instinct,” he said.

--With assistance from Joe Mayes and Andrew Atkinson.