The impact of inheritance tax is increasing.
According to recent figures from the HMRC, the number of estates affected by inheritance tax has risen by 24 per cent over the past year, and the number affected will continue to rise in the coming years.
This has been at stake for some time now, as Britain’s richest-ever generation begins to approach average life expectancy.
But the estate tax situation has been exacerbated in recent years by the pandemic housing price boom that has sent average property values up 25 percent since April 2020.
In large parts of the country, you don’t need a mansion to end up in the inheritance tax net – a detached four-bedroom single-family home added to your lifetime savings will suffice.
The problem of rich people? In much of the country, even a relatively modest large family home is enough to push people into the inheritance tax net
As more are affected, the debate over inheritance tax is likely to intensify.
It is often a matter of whether inheritance tax should be abolished altogether, or whether the threshold should be raised substantially, to take into account inflation, rising asset values and rising house prices.
On the other hand, some argue that the net should be tightened and more taxes should be paid on inheritances.
My idea is different: inheritance tax should go to 20 percent.
The best way to detoxify estate taxes is to radically simplify them and levy them at a much more agreeable rate.
I’d do away with the complex and antiquated set of exemptions, have a tax-free threshold of £1million and lower the estate tax to a fixed 20 per cent above that.
My argument is that a 20 percent levy feels much more reasonable than a 40 percent tax and that it greatly reduces the incentive to avoid estate taxes and creates less reason to dislike it.
And we hate it, we do. Inheritance taxes have long laid claim to the dubious title of Britain’s most hated tax, regularly winning polls of the charges people dislike most.
A 2021 Hargreaves Lansdown survey found it topping the list of most hated taxes, with 24 per cent of the vote, ahead of the 17 per cent who said they disliked income tax the most.
More recent research from insurer NFU Mutual found that 57 percent thought estate taxes were unfair, compared to just 18 percent of those who thought it was fair.
This attitude has long been a curiosity, because while a very large portion of the population pays income tax, social insurance, VAT, and even occasionally capital gains tax and stamp duty, not many people pay inheritance tax.
Even after that 24 percent increase mentioned at the beginning of this column, the number of estates affected by IHT last year was just 41,000.
That will continue to rise, but even ambitious projections only suggest an increase from one in 20 estates to one in 10 estates.
So, what’s behind the estate tax status rogue?
Complaints include that it was a tax designed for the very wealthy and now hits the wealthy middle class harder, that it is disproportionately hitting the south of England, and that the threshold and allowances have been repeatedly frozen.
These grumbles are all fair enough.
In 2018, Philip Hammond, as chancellor, instructed the Office of Tax Simplification to come up with a plan to review the estate tax (which, of course, the government has completely ignored since then).
The OTS report on Inheritance Tax was a deep dive that highlighted how crazy it has become. It is a mess of loopholes, overly complicated rules, unfair elements and outdated fees.
Among other things, the OTS pointed out that: the very wealthiest estates pay a much lower rate of effective estate tax, as the very wealthiest are better at tax avoidance; the unmarried are penalized compared to spouses and registered partners, non-homeowners and the childless are treated unfairly, and that annual gift grants are vastly outdated.
Under the rules, only £3,000 can be given away each year without risking an IHT liability, which would be over £10,000 if it had risen with inflation, while also allowing only £5,000 as a special exemption for a wedding .
However, the two biggest problems people have with estate taxes don’t get into those details, but are about a tax on money already taxed and the high rate.
The former is not entirely accurate, as capital taxed on death includes the rising value of assets such as investments and homes, which have not previously been taxed.
But that’s not to say there’s no point: The income that went into savings accounts, investment pots, and buying homes was taxed — and so was savings interest, dividends, and capital gains along the way.
Inheritance tax is therefore at least partly a tax on money already taxed.
The last groan brings us back to my case for lowering the rate: 40 percent sounds like a lot — our minds are trained to think that’s almost half.
Lower the load to 20 percent, on the other hand, and it doesn’t sound nearly as bad.
It might seem silly to do this when the tax burden mounts to try and balance Britain’s books, but another vital point made in the OTS report was that despite its highly controversial and high-profile status , inheritance taxes don’t even raise that much money. .
“Inheritance tax makes up less than 1 percent of the total tax collected by the Treasury,” says the OTS. “To put this in context, this would cover just over a week of the cost of UK pensions and social services in that year.”
If a tax is considered unfair by so many, it undermines the system, is it worth it if it barely makes a dent in tax revenue?
With an election approaching and the Conservatives looking to attract voters — and not lose more than they already have — IHT seems like a likely target for a potential giveaway.
It’s also long due to a revision.
But whatever form an estate tax shakeup takes, it will be highly controversial.
Read Tanya Jefferies’ report on what experts think should be done about estate taxes and vote in our poll to have your say.
> Need help with inheritance tax? Find a financial planner service
Some links in this article may be affiliate links. If you click on it, we may earn a small commission. That helps us fund This Is Money and use it for free. We do not write articles to promote products. We do not allow any commercial relationship to compromise our editorial independence.