There’s been a lot of chatter recently about whether or not Inheritance Tax should be abolished. With a general election around the corner, it’s a topic that likely to get even more attention over the next few months. Former chancellor Nadhim Zahawi and some media outlets, including The Telegraph, have called for it to be scrapped.
And that was even before the recent news that 49,400 additional estates will be paying inheritance tax over the coming years. More families than that will have to pay the tax – an estimated 283,400 estates in total – but most of those would have paid it anyway.
So why will more people have to pay inheritance tax now?
The reason is inflation. The values of estates has been going up in recent years, mainly due to rising house prices. Now, higher wages and inflation are causing the value of savings and other assets to go up as well.
The problem is that you are only allowed to pass on a fixed amount when you die before paying inheritance tax. This amount has not gone up. It has been frozen by HMRC until the tax year 2027-28 (and who knows what will happen then).
The Government could have decided that it would rise in line with inflation. But that’s not what happens. So over time, more families inherit estates that are above the threshold.
Writing in today’s (31st July 2023) edition of The Telegraph, Matthew Lesh of the Institute of Economic Affairs gives his opinion on this rise.
It (Inheritance Tax) was sold as being highly progressive, with relatively few forced to pay, but soaring inflation and stubbornly high house prices, combined with frozen tax thresholds, are dragging more families into the net. The tax does not kick in in the US until an estate is valued at more than $12.92 million (£10 million). In the UK, it can be imposed from as low as £500,000 – and that threshold is scheduled to be frozen for years.
In fact, the situation is even harsher than Lesh suggests. If you don’t own a property that you can pass on to children or grandchildren, you can only pass on £325,000 (“nil rate band”) free of inheritance tax, not £500,000.
This particular issue won’t affect many too people. In most cases it’s the value of a property that pushes an estate over the threshold. But it does seem unfair to people who don’t own homes, and indeed people who do own homes but don’t have children or stepchildren and wish to benefit nieces and nephews instead.
Lesh points out that many people who do have to pay inheritance tax are not mega-rich:
Many of these families won’t be the ultra-wealthy, who are known to arrange their tax affairs carefully to avoid paying inheritance tax. It will be those who cannot afford to fully protect their assets from the state who will suffer the most. They await the grim tax reaper knocking on their door, forcing them to cough up large amounts of cash at one of life’s most painful moments – the death of a loved one. This harsh reality of death duties is perhaps why relatively few believe that inheritance tax is fair.
It’s a good point about ultra-wealthy people being able to afford good advice so that they can avoid inheritance tax. But that’s also true of ordinary people. Something I do as a Will Writer is look at a client’s estate and point out if they’re likely to pay inheritance tax or not, and suggest experts who could help their situation.
And while it’s true that avoiding inheritance tax sometimes means spending some money now, albeit far less than your estate will be tax, it might also be avoided with a different type of Will. Everything depends on your personal circumstances.
But Lesh makes an interesting point about the mega-rich: most did not inherit their wealth:
The wealthiest people today are self-made entrepreneurs, many of whom have lifted themselves from modest backgrounds. Analysis of the world’s richest individuals by Wealth-X suggests 68 per cent are self-made and a further 24 per cent are partly self-made.
So why continue with a tax on the basis that it drives inequality? As Lesh argues, you could say that it discourages businesspeople from building up wealth.
Ultimately, inheritance-tax abolition could have broader benefits. That’s because the tax penalises working and saving, as the taxman will take a greater proportion of any rewards.
Ultimately, he says, inheritance tax raises £7 billion, less than 1 per cent of government revenues, and raising it is hardly free. HMRC needs funds to ensure compliance and enforcement costs.
And then there’s the possible lift to the economy if we did get rid of it, says Lesh:
A Tax Foundation study in 2015 concluded that [abolition of] inheritance tax could boost the US economy by 0.8 per cent – which, if applied to the UK, would mean billions in annual GDP boost. It also calculated that the higher investment and employment would more than make up for any lost government revenues in the long run.
Interestingly, we wouldn’t be the first country to get rid of inheritance tax.
Several countries have abolished inheritance taxes since the turn of the century, including Scandinavian social democracies such as Sweden (2004) and Norway (2014). There’s nothing to stop the United Kingdom from being next. It would cost relatively little, make our tax system simpler and fairer, mean less wasted on estate planning, and could even boost the economy.
Lesh makes some interesting arguments. I’m with him on the fairness argument. Inheritance tax does seem unfair, in particular the extra allowance you can claim if you own a property.
And if the predictions are correct, the country would be better off by scrapping it. But predictions aren’t always correct, of course. If the country ended up worse off, the tax shortfall would no doubt be grabbed back somewhere else.
Ultimately, nobody has any way of knowing whether or not inheritance tax will be scrapped – possibly not even Rishi Sunak. All we can do is plan our affairs on the basis of today’s laws and adapt accordingly, as and when things change.
In my experience of writing Wills for people in Bristol and the surrounding area, many people are only vaguely aware of the different inheritance tax “nil rate bands”. Many don’t understand the implications of being married vs. cohabiting for inheritance tax, or how assets like a rental property can push them over the threshold.
The Telegraph opinion column by Mathew Lesh is worth reading in full: https://www.telegraph.co.uk/news/2023/07/31/taxing-inheritance-leaves-everyone-poorer/