An opinion piece in the buildup to the 2024 Autumn Budget on the need to reform Inheritance Tax.
In the aftermath of the 2008 financial crisis, then-Chancellor Alistair Darling froze inheritance tax thresholds until 2014/15 in the March 2010 budget, to raise taxes at a time of economic downturn and high government spending (Government Budget, 2010). The freeze in thresholds did have the desired effect, and inheritance tax receipts rose from £2.34bn in 2009 to £4.38bn in 2015, the highest total ever (Office for National Statistics, 2024). This represented an increase from 0.151% of GDP up to 0.229% of GDP (GDP figures from the Office for National Statistics, 2024). The subsequent failure to change the threshold since then has led to further increases in inheritance tax receipts, and in 2023 receipts were £7.49bn, equivalent to 0.275% of GDP. Despite being an efficient form of raising tax, there are many macroeconomic implications and ethical questions that arise over a tax on death. I will use the following article to express the case for urgent reform to inheritance tax before it becomes a more integral part of the tax system.
Firstly, the failure to raise inheritance tax thresholds means that the tax impacts upon a greater number of people, and the burden is increasing on middle-class families. Initially, the inheritance tax was designed to only be paid by the wealthiest families, and government data shows that in the 2009/10 tax year only 2.7% of deaths resulted in an Inheritance Tax charge (HMRC, 2024). This increased to 4.4% by the 2021/22 tax year, and the Institute for Fiscal Studies estimate over 7% of deaths will be liable to inheritance tax by 2032/2033 if current laws do not change (IFS, 2023). This occurs because of ‘inheritance tax fiscal drag’. In essence, property and other asset prices have risen drastically since 2010, however the failure to change the inheritance tax threshold has dragged increasing numbers of people into paying the tax.
The main purpose of inheritance tax; reducing the impact of generational wealth and promoting economic equality, is diminished as more people get dragged into paying it. The government must raise the tax threshold to prevent this from happening. Alternatively, the government could introduce a more progressive inheritance tax system with staggered tax brackets. The benefit of doing this would be that it ensures people receive different marginal tax rates, dependant on the wealth of the deceased individual. The wealthiest families would be paying the higher rate of tax, but the middle-class families who have been impacted by the recent ‘inheritance tax fiscal drag’ would be faced with a new, lower rate of tax. This policy would ensure that the tax still hits wealthiest families the hardest, and the original purpose of the inheritance tax is not diminished.
Secondly, inheritance tax may be problematic considering ‘The Great Wealth Transfer’ set to occur in the UK. ‘The Great Wealth Transfer’ is a phrase referring to the passing of wealth from the ‘Baby Boomer’ generation (named after the post-World War 2 baby boom 1946-1964) to ‘Generation X’. There will be an estimated 7 trillion pounds transferred between these generations by 2050 (Vanguard, 2024). One of the main challenges of inheritance tax on this transfer is that many middle-class families will be unable to inherit homes tax-free, potentially forcing them to sell the house. For example, the average London house of £508,000 (Office for National Statistics, 2023) exceeds the £500,000 limit for passing a main residence onto direct descendants (£325,000 + £175,000 additional). With no plans to raise the inheritance tax threshold until at least 2028/29, and house prices rising drastically, more families in London and the South East will be liable to pay inheritance tax on their homes.
A consequence of the high inheritance tax on these families is that there will be increased house sales, putting downward price pressure on the housing market – particularly in the areas more susceptible to paying inheritance tax. This may cause a risk to mortgage lenders, as people are put in a scenario called ‘negative equity’, where the outstanding mortgage on a house is higher than the current value of the house. ‘Negative equity’ means that homeowners cannot sell or refinance their homes without making a loss. It was one of the fundamental issues that caused the 2008 financial crisis (Bank of England, 2009), and unless inheritance tax law is changed, a similar crisis becomes more likely today.
Thirdly, the UK’s inheritance tax rate must be lowered, as the 40% rate is internationally uncompetitive and contributes to the departure of the wealthiest people from the UK. The UK’s inheritance tax rate compares to the 8% maximum rate in Italy (Giambrone Law, 2024); and many countries such as Australia have no inheritance tax at all (Australian Government, 2024). Consequentially, the UK ranks second globally for the number of millionaires leaving annually, with 9,500 leaving in the year 2023. This compares to Australia ranking fifth and Italy sixth in terms of where millionaires are moving to, with 2,500 and 2,200 millionaires moving to these countries in the same year. The report, conducted by Henley & Partners (2024) indicates that one of the main reasons for leaving is the fact that “estate duty rates in the UK are amongst the highest in the world.”
This trend presents a significant challenge for the UK, as the IFS (2024) report that the top 1% of earners paid 28.5% of income tax receipts in 2023/24. As well as losing out on tax revenue, the UK loses out on the other economic benefits of having vast numbers of high earners in the country, such as depleted economic growth and a lack of innovation, as high earners play a crucial role in stimulating investment and job creation. The exodus of UK millionaires may be part of the reason that the UK’s growth has lagged behind that of other comparative G7 countries since the outbreak of the COVID-19 pandemic. (Statista, 2023). Without reform to the UK’s inheritance tax rate, this trend is likely to continue.
Fourthly, the tax is deeply unpopular. A YouGov poll (2024) shows that only 22% of people believe it is fair, compared to 52% who believe it unfair. The most cited reason for the belief of unfairness is that “tax has already been paid on it when earnt”, followed by “People should be free to leave everything / The government shouldn’t be able to tax inheritance.” (YouGov, 2023). The ‘double taxation’ argument stems from the belief that all money earnt has already been taxed; thus, the imposition of an inheritance tax means that the same money has now been taxed twice before it can be passed onto families.
The ‘principled argument’, that the government should not be able to tax upon death, stems from the emotional stress that the tax causes families who are already particularly vulnerable following the loss of a loved one. From an ethical perspective, the tax is particularly harsh as is imposed upon grieving relatives already suffering an emotional burden, who are then confronted with a financial burden as well. The insensitivity of this tax, given how little it raises in perspective of public finances, projected to raise only 0.7% of total tax income in 2024/25 (Office for Budget Responsibility, 2024), is perhaps the strongest argument for scrapping the tax altogether.
Overall, it is clear that inheritance tax needs urgent reform. Though the tax may not need to be scrapped altogether, as it does have some benefit in terms of the reducing the impact of generational wealth, the rate ought to be drastically lower to remain internationally competitive and reduce the exodus of millionaires. The threshold to pay the tax should also be raised in accordance with house price inflation. This will help prevent middle-class families from being caught by ‘Inheritance Tax fiscal drag’ and ensure that the tax burden is only felt by the wealthiest households. These changes must be prioritised before the issue becomes more deeply embedded in the tax system.
References
Australian Government. (2024). If you are a beneficiary of a deceased estate. https://www.ato.gov.au/individuals-and-families/deceased-estates/if-you-are-a-beneficiary-of-a-deceased-estate
Bank of England. (2009). The economics and estimation of negative equity. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2009/the-economics-and-estimation-of-negative-equity.pdf
Giambrone Law. (2024). Italian Inheritance Tax Costs Explained. https://www.giambronelaw.com/site/international/italian-solicitors/probate-trust-management/italian-inheritance-tax-amount/
Government Budget. (2010). Securing the recovery (House of Commons Library, page 1). https://assets.publishing.service.gov.uk/media/5a74e4ef40f0b65f613231a0/0451.pdf
Henley & Partners. (2024). The Henley Private Wealth Migration Report 2024. https://www.henleyglobal.com/publications/henley-private-wealth-migration-report-2024
HMRC. (2024). Inheritance tax liabilities statistics: commentary. https://www.gov.uk/government/statistics/inheritance-tax-liabilities-statistics/inheritance-tax-liabilities-statistics-commentary#about-this-release
IFS. (2024). Income tax explained. https://ifs.org.uk/taxlab/taxlab-taxes-explained/income-tax-explained
IFS. (2023). Reforming inheritance tax: Green budget 2023 – Chapter 7. https://ifs.org.uk/publications/reforming-inheritance-tax
Office for Budget Responsibility. (2024). Inheritance tax. https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/inheritance-tax/
Office for National Statistics. (2024). Inland Revenue: capital transfer/inheritance tax receipts £ million. https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicspending/timeseries/acch/edp2
Office for National Statistics. (2024). Gross Domestic Product at market prices: Current price: Seasonally adjusted £m. https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/ybha/ukea
Office for National Statistics. (2023). UK House Price Index: December 2023. https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/december2023#house-prices-by-region-in-england
Statista. (2023). Overall real growth of gross domestic product in G7 countries from 4th quarter 2019 to 1st quarter 2023. https://www-statista-com.uoelibrary.idm.oclc.org/statistics/1392678/g7-gdp-growth-since-covid-19-pandemic/
Vanguard. (2024). Navigating the great wealth transfer. https://www.vanguard.co.uk/professional/insights-education/insights/navigating-the-great-wealth-transfer
YouGov. (2024). How fair is inheritance tax? https://yougov.co.uk/topics/politics/trackers/how-fair-is-inheritance-tax
YouGov. (2023). Why do Britons think inheritance tax is unfair? https://yougov.co.uk/politics/articles/47940-why-do-britons-think-inheritance-tax-is-unfair
