Inheritance Tax in the UK: Reform Required

Abstract

Inheritance Tax (IHT) has been described as Britain’s ‘most hated tax’. Less than 25,000 estates are liable to pay IHT each year and in the 2019-2020 tax year, payment of IHT accounted for less than 1% of the total revenue raised. Despite these figures, IHT is still widely unpopular: it is viewed as a ‘voluntary tax’ that the wealthiest can minimise or avoid.

Whilst unpopularity does not justify reform, there have been calls made to alter and redesign IHT over the last decade by various bodies and experts. This essay focuses on the recommendations made by both the Office of Tax Simplification (OTS) and the All-Party Parliamentary Group for Inheritance & Intergenerational Fairness (APPG) that, in the author’s opinion, best demonstrate why IHT should be reformed: the treatment of lifetime gifting and the rate of tax. It also guided by two of Adam Smith’s canons of taxation, fairness and certainty, as well as by The Mirrlees Review’s call for a simpler and neutral tax system.

This essay concludes that replacing the current array of lifetime gifting exemptions with a single annual allowance, imposing a flat-rate gift tax when that allowance has been reached, and lowering the rate of tax would make IHT fairer, simpler, and more certain, whilst encouraging neutral behaviour. Although the Chancellor’s March 2021 Budget made no changes to the IHT thresholds, reform may still be seriously considered to aid recovery from the impact of COVID-19.