By Legal Futures Associate Tower Street Finance
Inheritance tax (IHT) is possibly one of the most talked about taxes (after Income Tax) in the UK. For some, it is the most unpopular tax; for others, it is the most justifiable tax.
Here we look at the views for and against it, and whether the likelihood is for it to be abolished. The current climate sees significant challenges in the shape of the cost-of-living increases, increasing property values, unfunded tax cuts, increasing Government debt and a General Election looming in just over 2 years’ time. Will any of these factors drive change for Inheritance Tax.
What is IHT and why do we have it?
A form of death duty first dates back as far as 1694 when ‘Probate Duty’ was introduced on personal property in Wills proved in court. A form of modern-day inheritance tax was introduced in 1894, when the Government needed to raise funds to fill a £4m (which was large in those days…!) deficit.
Following the Second World War the then called Estate Duty was increased from 60% to 80% to help rebuild the country. The highest percentage rate reached was 85% in 1969. Ultimately this settled down to 40% in 1986 with the introduction of the Inheritance Tax we know today. The rate hasn’t changed since then.
How many people pay IHT?
This surprises many people but today, only 1 in 20 estates in the UK (5%) pay IHT (and that has increased from 1 in 25, or just over 4%, before the pandemic). However, there are several reasons why Inheritance Tax creates so much attention and occupies many inches in newspaper columns including:
- the Government receives over £6bn a year through IHT receipts so in the current climate it is a significant contributor to balancing the books
- the threshold for paying any IHT is £325k, and can be as much as £1m for a married couple if they leave their main property to direct descendants, so it is viewed very much as a ‘tax on the rich’ (this is reinforced by the fact that London & Southeast accounts for almost 50% of IHT takings across the UK)
- allowances for IHT have been frozen since 2009 until 2026 meaning that even more estates will incur IHT going forward given the increases in property prices we have seen over the last decade or so – this means that it may no longer just be a ‘tax on the rich’
So, with these seemingly contradictory forces, we examine the arguments for and against…
Why is it a particularly unpopular tax?
One of the main reasons IHT is so unpopular is the view that inheritance tax is a “double taxation”. The assets being taxed have been bought with funds that have likely been earned and taxed already.
However, the counter argument to this is that increases in property prices have not been ‘earned’ in the traditional sense and can be considered more like ‘profit’ and given property prices have almost doubled since the IHT threshold was last changed they are ‘fair game’.
The average IHT bill in the UK is over £200,000 so if you have to pay it, it is likely to be a large number. However, as indicated above, there can be IHT allowances of up to £1m so there is likely to be significant other value in the Estate.
The other reason IHT is unpopular is that HMRC requires an Executor of an Estate to pay the IHT to get the Grant of Probate. A Grant of Probate is needed for the Executor to get control of the Estate assets, so there is a classic ‘chicken and egg’ situation – the Executor needs to sell the assets to pay the IHT, but they must pay the IHT to get control of the assets*.
Why would the Government consider abolishing it?
The tax is generally levied towards an older and wealthier demographic, particularly in the Southeast of England, which is a demographic heavily represented within the Conservative Party membership. So theoretically, removing it should play well with the membership, and their traditional voters in the Southeast of England with an election due in just over 2 years’ time.
However, Rishi Sunak, the new Prime Minister, is known to be not in favor of abolishing the tax but had hinted in the Summer that he might consider lowering the rate. Clearly though, that was a long time ago in politics!
Whilst IHT generates £6bn in tax receipts per year, some in Government believe that is a reasonably small amount in the grand scheme of things, so the Government wouldn’t be losing a vast sum, and would lead to more ‘wealth creation’ in the country. A Conservative Treasury Minister recently suggested that abolishing IHT would be his ‘top choice’ for a tax to abolish.
However, the counter to this argument is to look at what happened when the last Chancellor suggested abolishing the 45% tax rate to aid wealth creation – there was so much backlash about benefiting the rich when the less well-off need help with the cost-of-living crisis that it was reversed. Some might say that abolishing IHT would suffer the same reaction amongst the general public.
So where do we stand?
Given the current economic climate, and the recent turmoil in the Government over un-funded tax cuts, every penny counts. Removing IHT at a loss of £6bn would not play well to people struggling during the financial crisis – let’s face it, £6bn could help a lot of people stay warm this winter!
There are reports that the Chancellor is considering extending the freeze on thresholds until 2028 as part of his forthcoming Fiscal Statement, which will help with raising more taxes, but is not an immediate help with balancing the books.
Dicky Davies, Business Development Director and co-founder of Tower Street Finance said:
“IHT seems to invoke very strong emotions amongst many people, either for or against it, and is polarised to either wanting to increase the rate or abolish the tax altogether. We suspect that given recent Government issues and the need to calm the money markets, abolishing a tax that affects the rich more than the poor will be a long way down on the new Prime Minister’s agenda, and small changes are more likely.
“If you are hit with an IHT bill, the growing Probate Lending market is there to help. An IHT Loan can help Executors settle IHT liabilities without eating into their own finances or taking on the liability of secured loans. Estate Expense Funding helps Executors to pay any testamentary expenses including funeral costs, administration or legal fees and property maintenance.
“There are even solutions to enable Beneficiaries to access their inheritance quicker through an Inheritance Advance.”
Contact Tower Street Finance if you would like more information on Probate Lending and the range of solutions at www.towerstreetfinance.co.uk.