UK Taxes: Is inheritance tax fair?

uk taxes

We’ve discussed the basic mechanisms of inheritance tax (IHT) and a few things that you can do to minimise your estate’s inheritance tax bill here.

In summary:

– Inheritance tax of 40% is owed on the portion of estates that exceed £325,000
– It is possible to reduce your inheritance tax bill by: moving abroad around 20 years before death, giving your assets away 7 years before death, setting up a trust for your beneficiaries or passing on a company.

The argument for inheritance tax

– It taxes the rich. UK GDP average income is currently around £30,000, and that number includes the incomes of private equity bosses, MPs, football players and so on. So the IHT threshold is over 10 years of average income and probably even more than that for most people. Only around 8% of the people who pass away each year have IHT due on their estates.

– It discourages investment in unproductive assets in favour of productive ones. Because property and financial assets are subject to inheritance tax, but businesses are not, it encourages families to invest their wealth more entrepreneurially rather than as landlords.

– It is relatively simple and efficient for HMRC to assess and collect. UK taxes exist ultimately not because they are fair or unfair, but because the government needs revenue to provide public services. So whether through inheritance tax, income tax or capital gains tax, HMRC will levy some form of tax. As compared to some of these other taxes, IHT is very attractive: it is a one-time tax due on a relatively small number of large estates, and the amount due is fairly simple to calculate. Compare this to income tax, with its multitude of income tax returns, tax brackets, income tax refunds and tax credits. All the cost and effort that is saved by imposing a simple tax can then be channeled to other services and initiatives.

The arguments against inheritance tax

– It hits the middle class and leaves out the rich. The list of exclusions from inheritance tax is almost laughable. IHT is not due on fully-owned businesses, and is reduced on significant shareholdings. So while a middle class family might struggle to find £400,000 to pay on an inherited £1 million home, the owners of some of the biggest British and global businesses can pass their interests down without paying a penny. They can do so without even having to avoid taxes through complicated offshore structures that are sometimes used to minimize income and capital gains tax. The exclusion of certain kinds of agricultural land, woodlands and historical estates also benefit those families whose money is centuries old.

– It’s double taxation. While income tax and capital gains tax are charged on newly created wealth, inheritance tax is charged on assets that have already paid tax, in some cases multiple times.

– It’s not progressive. Unlike income tax and capital gains tax, which are assessed according to tax brackets, there is a single IHT rate – you pay 40% whether the taxable part of your estate is £100 thousand or £100 million.

In conclusion, of all the UK taxes, inheritance tax is perhaps the most controversial. But fortunately it is at least a tax that, with appropriate estate management, can be partially avoided without resorting to any complicated or legally dubious practices, as we discussed here. Given that the uber-rich don’t pay it on their mighty business interests, it is only fair that you do your best to minimize it too.


Chris has 9 years’ experience as a UK pension specialist and licensed financial advisor. He specialises in helping clients make balanced financial decisions to grow their personal wealth.

Chris is licensed with Holborn Assets, an award-winning international financial advisory firm established in 1999, with 10 offices and 15,000 clients worldwide.



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