The government has reported an increase of around 24% in the number of estates paying inheritance tax over the last year, largely thanks to rising house prices. The forecast for the 2023/24 tax year will equate to over £7 billion in revenue, representing 0.7% of all receipts and 0.3% of national income, according to the Office of Budget Responsibility.
So we ask – if the government doesn’t benefit greatly from inheritance tax, why is it expecting so many ordinary, middle class families to hand over thousands of pounds while the super rich find ways in which to avoid it?
Who pays inheritance tax?
Inheritance tax is no longer the preserve of the very rich, those leaving country estates or enormous mansions; around 41,000 estates paid the tax in 2022/23. Given that house prices have risen by over 70% between 2009 and 2022, while the inheritance tax threshold has been stagnant at £325,000, it is not surprising that this is the highest level of receipts in twenty years. This threshold has been frozen until 2027/28, when over 47,000 estates are estimated to be liable.
Taking into account the high level of inflation and surge in house prices, it is likely that the number of estates paying inheritance tax will continue to rise substantially, perhaps increasing to as many as 10% of estates, up from the circa 6% presently liable.
As the middle aged, home owning tier of the population drops off the perch, there is debate over whether our outdated inheritance tax rules should be overhauled.
Why do we pay inheritance tax?
The first form of the tax dates back to 1694, when probate duty on personal property in wills was introduced. Inheritance tax has had a complicated history but the form in which we know it today was first introduced in 1894 as estate duty.
Estate duty taxed the capital value of land and was designed to raise funds to pay a government deficit of £4 million. This tax replaced several others, including a tax on estates from 1796 that helped fund the war against Napoleon.
How much do other countries pay?
At 40%, the UK has one the highest levels of inheritance tax of the developed economies. It is the highest in Europe, where many countries don’t have it at all. Neither do we compare at all with the US, where an estate tax is only applicable on estates over $12.9 million (just over £10 million), or $26 million for couples. Furthermore, no such tax exists in Australia, Canada or New Zealand.
Why is it unfair?
Inheritance tax comprises a complex system of rules and allowances which are often unfair and outdated and, in part, effectively puts a tax on money that has already been taxed. It is all very well taxing money earned from investments including home values, but inheritance tax also covers any earnings put into savings accounts and the money used to purchase and invest in the home.
The complicated system disproportionately benefits the estates of the wealthy (who are more knowledgeable and able to access tax avoidance schemes), as well as married couples, those with children and home owners.
Inheritance tax thresholds have not risen in line with inflation or rising house price growth or asset values.
It is an unpopular tax, with some polls suggesting that most people believe it is the most unfair of all the taxes we are required to pay. This is surprising, given that most people pay income tax and national insurance on their income, or VAT on purchases or even stamp duty on house purchases – while few pay inheritance tax in comparison.
If it isn’t possible to abolish the tax completely, perhaps now is the time to reduce the 40% burden by lowering it to something more palatable, at the same time bringing the rules into the present century and levelling the playing field for everyone, regardless of wealth, status or relationship circumstances.