Andy Burnham, a prominent figure in the Labour party and a potential future prime minister, has indicated a desire to abolish inheritance tax. However, a proposed overhaul to replace it with a 'care levy' could lead to substantially higher and escalating tax bills for families, an analysis suggests.
Burnham has stated that he recognizes the public's "great resentment" towards inheritance tax and has suggested exploring a care levy as an alternative. While reframing the tax as a social care levy might seem more palatable, particularly given the aversion to estates being depleted by care home fees, the financial implications could be considerably greater.
In the 2024-25 tax year, families paid £8.4 billion in inheritance tax. In contrast, the total cost of adult social care in England alone was £34.5 billion, over four times the inheritance tax revenue. This figure is expected to rise due to an aging population and increasing costs, with adult social care projected to consume a growing portion of the UK's GDP.
The analysis posits that a levy designed to cover these escalating social care costs would likely need to increase annually at a steeper rate than current inheritance tax bills, which have largely tracked inflation. Furthermore, taxes designated for specific purposes are rarely ringfenced, meaning funds collected for a social care levy could be redirected by the government.
Another option previously considered by Burnham involves a 10 percent levy on all estates, which could broaden the tax base beyond the wealthiest households. If the current inheritance tax revenue were distributed equally, the average bill could amount to approximately £13,000 per family, though this would vary based on estate size.
While acknowledging the need for reform in both inheritance tax and social care funding, the analysis warns against the expectation of reduced tax burdens. It suggests that individuals considering passing wealth to loved ones might find it advantageous to utilize existing allowances for tax-free gifting now, as future policies under Burnham could make such transfers more costly.