Inheritance tax is levied on the estate of someone who has died. It applies to the value of the estate above the £325,000 threshold currently in place, and is charged at a single rate of 40 per cent. Exemptions currently in place include transfers between spouses and civil partners, transfers to charity and exempted gifts. This includes the seven-year rule (which reduces liability if gifts are made more than three years before death) and £3,000 of gifts each tax year. Reliefs also exist for agricultural property and business assets.
Inheritance tax is distortionary and deeply unfair. Exemptions prompt people to buy and sell assets to avoid tax, sometimes to the exclusion of other objectives. In particular, the exemptions for lifetime gifts encourage premature transfer of assets. Saving on behalf of heirs is discouraged in favour of immediate consumption. The introduction of the residence nil-rate band in 2017 also further inflates house prices and reduces capital available for other uses.
This research estimates the number of estates which would not be subject to inheritance tax if the threshold was raised from £325,000 to £1 million. It then provides an overview of recent trends in net capital value of estates, what additional charges are still levied on the dead, and revenue changes if a higher threshold was in place. A higher threshold would also mean the elimination of the main residence nil-rate band.
- This year (2019-20), a forecasted 39,409 estates will be subject to inheritance tax. If the inheritance tax threshold was raised to £1 million, 27,781 fewer estates would be subject to the levy, leaving 11,628 (or 29.5 per cent of the current total) with a bill to pay.
- Next year (2020-21), a forecasted 44,112 estates will be subject to inheritance tax. If the inheritance tax threshold was raised to £1 million, 30,854 fewer estates would be subject to the levy, leaving 13,259 (or 30.1 per cent of the current total) with a bill to pay.
- The total net capital value of estates subject to inheritance tax in 2016-17 was £75.8 billion; £17.8 billion was in estates worth more than £1 million. 36 per cent of the total net capital value of estates worth more than £1 million was in UK residential property.
- If inheritance tax was payable only on estates worth more than £1 million, the estimated revenue would be £3.9 billion in 2019-20 and £4.0 billion in 2020-21. This would mean receipts would be lower by £1.4 billion in both 2019-20 and 2020-21. The current overspend on the carrier strike programme (£3.2 billion) would more than offset the revenue decline.
- Even with no inheritance tax liability, estates will still pay for probate and land registry fees, death certificates, VAT from funeral costs and doctor’s fees for cremation could still total up to £824.