Inheritance tax: Current policy and debates

Inheritance tax is paid on the value of someone’s net estate at death (calculated as the value of their assets, minus debts, and after calculating tax reliefs available). Inheritance tax is charged at 40% above a threshold, currently set at £325,000. This threshold is often termed the ‘nil-rate band’.

‘Gifts’ made during someone’s lifetime are usually known as ‘potentially exempt transfers’, because they do not become part of someone’s net estate if they are made seven or more years before their death. Inheritance tax charges may apply at a progressively lower rate between seven years and the time of death.

Some gifts are always exempt from inheritance tax, regardless of when they are made.

Reliefs from inheritance tax

There are several reliefs available to people, which reduce inheritance tax liabilities, particularly:

• The transfer of assets between spouses and civil partners (during life or at death) is entirely exempt from inheritance tax
• If the main home is passed to a spouse or civil partner, the home is not included in the value of the net estate. If it is passed to direct descendants, the nil-rate band is increased to £500,000.
• Owners or part-owners of a business or agricultural property may be eligible for 50% or 100% relief from inheritance tax on those assets. These reliefs are known as Agricultural Property Relief (APR) and Business Property Relief (BPR).

Who pays inheritance tax?

HMRC reported that 27,000 estates (3.73% of all deaths in the UK) paid inheritance tax in 2020/21. The tax raised £5.76 billion that year. The total value of wealth protected from inheritance tax was around £28 billion, chiefly because of transfers between spouses and civil partners, which accounted for £15.7 billion of wealth protected.

The administration of inheritance tax

The administration of someone’s estate is undertaken by a personal representative (if there’s a will, they are known as the ‘executor’). They are responsible for working out the net value of the deceased’s estate and whether inheritance tax has to be paid. Recipients of gifts that are liable for inheritance tax are responsible for paying it on those gifts. HMRC provides detailed information for people in this situation.

Several commentators have said the structure of inheritance tax  is complex, which can cause issues for an estate’s representatives. HMRC offers specialised support for those dealing with a deceased’s estate. In 2022, the Government introduced new reduced reporting requirements for the majority of estates, to simplify the process.

Recent policy decisions

Between the 1990s and the early 2000s, the amount raised in inheritance tax was increasing, as was the proportion of estates becoming liable for it. Two major reforms were introduced to reduce overall inheritance tax liabilities:

• In 2007, the Labour Government introduced a transferable nil-rate band between spouses and civil partners, allowing spouses to leave any unused portion of the nil-rate band at their death to their partner
• In 2015, the Conservative Government introduced an additional nil-rate band for transfers of a main residence to a direct descendant. This nil-rate band was originally set at £100,000 and rose to £175,000 in 2020/21.
• In October 2024, the Labour Government announced that, from April 2026, the 100% relief available for assets eligible for APR or BPR would be capped. This would be set at £1 million, comprising the combined value of agricultural and business assets eligible for APR or BPR.

Options for reform

Inheritance tax is the most unpopular tax in the UK, according to polling, despite less than 5% of estates being liable for the tax. This has led several commentators to propose abolishing the tax. Numerous arguments are given in favour of abolition: for example, that inheritance tax represents double taxation, it is unfair, or it hinders economic growth. Some commentators who favour abolition say it could be replaced with a wealth transfer tax (PDF) that is based on taxing the recipient, rather than the donor’s estate. Many also point to the inefficiency of the tax, since the wealthiest people have several options to avoid it. Some researchers believe that the gift system should be reformed, so that vast wealth that is distributed during someone’s lifetime can be taxed effectively, rather than escaping inheritance tax entirely. Some economists and commentators also argued that individual elements of the tax could be reformed.