A few years ago, my wifes uncle died. A quiet, unassuming man, Uncle Tony lived alone in a house in our village, making do on a tiny pension that barely allowed him to turn on the heating a few hours a day in winter.

In every sense of the word, Uncle Tony was poor: his shirts were frayed at the collar and his meals consisted of baked beans on toast or cut-price, past-their-sell-by-date bargains from the discount aisle of Tesco. Except, when he died, those to whom he had left his sole asset the house he had lived in all his adult life discovered that, property prices being what they were in our area, his net estate was worth an amazing 750,000.

To be sure, his inheritors were required to pay a whopping 170,000 in inheritance tax. Plus, the number of those who shared out what was left was not insignificant. Even so, each of them received a lot more money than most could realistically hope to earn in several years of wage slavery.

Excessive taxation?

Tax or no tax, being left a shedload of money for doing nothing more onerous than taking Uncle Tony out for a pie and a pint once a month, or having him round for a Christmas dinner, would strike most of us as an excellent deal. Not for the Institute of Economic Affairs, apparently. In October this year, their director general, Mark Littlewood, wrote a piece in The Times newspaper about the pernicious effect of excessive taxation, not least that of IHT.

Littlewood cited the supposedly authoritative findings of a right-wing sorry, libertarian US thinktank heavily funded by the Koch brothers, which suggest that the UK is ranked a disappointing 25th out of 36 countries by the Organisation for Economic Co-operation and Development for its international tax competitiveness. He then proposed the abolition of IHT, or raising its threshold even further.

How would this be paid for? Ever the egalitarian, Littlewood suggested it could be done by stripping away certain schemes that tend to benefit the more affluent. As an example, he told his readers: There is very little to justify the tax-free lump sum people can withdraw from their pension pot. Putting an end to that carve-out could, for example, go alongside reducing or eliminating IHT.

Lets look at this in more detail. According to HM Revenue and Customs own figures, the number of UK deaths resulting in an IHT charge during 2016-17 (the last available figures) was just over 28,000. Thats about 4.5 per cent of all UK deaths that year.

Around 5.4bn was raised in IHT in 2018-19 (those deaths have a long tail), with net estates valued at 1m or more accounting for a whopping 72 per cent of the total amount raised. The number of those 1m-plus estates represented 3 per cent of all estates requiring a grant of representation, which you apply for when you may be required to fill out an IHT form. A mere 8,820 estates made up 23 per cent of all gross assets before tax.

In effect, what Littlewood and the IEA are suggesting is that tax rules that raise a not insignificant slice of cash to pay for wider social needs such as roads, schools and hospitals, while still leaving the overwhelming majority of it in the hands of inheritors who have done nothing to earn it, be scrapped to benefit a few thousand people every year. And the people who would pay for it immediately would be the middle classes, for whom accessing some or all of their 25 per cent tax-free lump sum at retirement was always seen as a bonus for saving into a pension during their thrifty working lives.

They are being joined by millions of working-class savers who, as a result of auto-enrolment, have just started squirreling money into workplace defined contribution schemes and may wish to access some of that cash when they retire.

Never mind that the IEA is effectively asking the government to do away with one of the most powerful incentives for people to save for their retirement. Or that, for increasing numbers, that lump sum is probably one of the few occasions when retirees can afford some small luxury or pay off their last few debts when they stop work.

Change on the radar

None of this may matter if not for two interlinked factors. The first is the possibility that the Conservatives will win the general election. More concerning is the fact that the current chancellor, Sajid Javid, told the most recent Conservative Party conference: I shouldnt say too much now but I understand the arguments against that [IHT] tax.Sensible changes have already been made but its something thats on my mind.

In other words, this idea is definitely on the radar of someone with the capacity to make the change happen.

If this were to come about, it would benefit the few at the expense of the many. I cant imagine many financial advisers, even those who instinctively back the Tories in any election contest, supporting something as retrograde as this.

Nic Cicutti can be contacted atnic@inspiredmoney.co.uk

Follow him on Twitter @niccicutti

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Nic Cicutti: Why IHT needs to stay right where it is - Money Marketing