Inheritance tax is a tax on the estate of someone who has died, including their possessions, money and property. The threshold above which one’s estate is taxed is at £325,000; anything above this threshold will be taxed by 40%.
Passing on property to direct descendants increases the threshold to £500,000, and as allowances can be transferred between spouses and civil partners, the threshold for some can effectively rise to £1 million.
Inheritance Tax was introduced under its official name in 1986. However, the current law was heavily influenced by another, titled the Finance Act 1894. The 1894 Act essentially conflated and replaced a large number of taxation duties that people would find themselves responsible for after the death of a loved one.
As with all things relying on the economy, inheritance tax ebbed and swelled. Its peak was in 1969, when the tax on estates above £750,000 was 85%.
Until recently, the death duty was almost exclusively reserved to the estates of the upper classes, as they were the only ones to usually exceed the £325,000 threshold for taxation. As such, this did not severely financially impact the inheritance taxpayer, who likely had enough money to go around. Thus, the inheritance Tax would help level things out.
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As house prices rise, so does the value of one’s estate. Similarly, if the deceased had lifetime savings which were boosted by high interest rates, as well as other investments, these assets could also add up to a figure exceeding the threshold. This, combined with the soaring post-Covid inflation Britain has been experiencing has sent many estates over the death duty threshold. This rise in estate value has left some middle-class families struggling.
But regardless of the exceptional post-Covid economic situation, a rise in house prices and inflation are both predictable changes. However, the £325,000 IHT threshold has not been changed since April 2009.
Due to it being considered ‘a mainstream tax on ordinary people’ by some, the nation is now starting to notice the extraordinary returns that the taxman has had on the IHT in recent years. In 2022, the HMRC collected a whopping £7.1billion of inheritance tax. That is an additional £1 billion compared to the previous year – and by 2027/28, that number is expected to hit £8.4 billion. Moreover, in 2023, over 40,000 people are liable to pay inheritance tax, up an incredible 33,000 from the previous financial year. But are most of them actually being taxed unfairly?
A loophole that the wealthy have been employing for hundreds of years in order to reduce their inheritance tax duties is gift-giving. The law states that ‘gifts made over seven years before death do not incur any tax and the exclusion gradually reduces so that gifts made less than three years before death incur 100% tax’.
This means that, in what has become standard practice among the wealthy, grandparents can offer their grandchildren numerous gifts up to £2,500. Gifts from parents on marriage of up to £5,000 are also completely exempt.
But for those with unexpected death duty, lavish gifts are not common practice. Instead, older homeowners have been taking out mortgages in order to minimise the amount of money that they will need to hand over for inheritance tax. By taking out mortgages, the homeowners can effectively hand money over to their family that they would otherwise be taxed on after their deaths. This way, if the homeowner does not pass away in the next seven years, the cash-in-hand mortgage ‘gifts’ cannot be taxed.
Recently, over 50 Conservative MPs, led by multimillionaire Nadim Zahawi have been campaigning to abolish the inheritance tax. However, although the number of middle-class taxpayers paying death duty has starkly increased in the past years, the question that is being raised is whether abolishing the tax completely and relieving those individuals of their duty is worth also relieving those on the furthermost end of the financial scale of theirs. After all, should we not be taxing the ultra-rich?
When considering this, in spite of the fact that some of the newfound 33,000 death duty payees are struggling as a result of the tax, abolishing it does not seem justifiable. In the words of James Kirkup, director of the Social Market Foundation:
“Inherited wealth [can be regarded] as harmful to social mobility and economic efficiency. We’d rather see large accumulations of wealth redistributed by the state than cascade down to children who may already have enjoyed significant economic and social advantages.”
Director of the Social Market Foundation
As such, the Conservative Party is relying on a collective sentiment of injustice in their campaign for the abolishment of the tax, brought on by the idea of ‘double taxation’. But in cases of wealthy individuals having actually been spared their death duty, the public justifiably felt strongly against the abolition of the IHT.
For example, when Queen Elizabeth The Queen Mother passed away in 2002, she left her £50 million to Elizabeth II. A deal made back in 1993 spared the Queen of any inheritance tax – which would have amounted to an estimated £20 million.
But solutions do exist, and they can be employed in order to tax those who can afford it, and spare those who cannot. What the government will do about it, however, remains to be seen.
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