Inheritance Tax: How Does the UK Stack Up Globally?

The air is abuzz with talks of the Conservatives looking to change the inheritance tax system. Why? They’re hoping to win over voters for next year’s election. Now, while politicians debate, the FT compares how the UK’s system matches up to other countries.

Few Brits Actually Pay Inheritance Tax

Inheritance tax (often shortened to IHT) isn’t popular. Many call it the “most disliked” tax. Why? Because it’s linked with a sad time – the passing of a loved one. But here’s a surprise: despite the complaints, very few Brits are actually paying it. The latest data reveals that less than 4% of estates in the UK are taxed.

And when we look globally, the UK seems quite lenient. We’re behind only Italy and the US, where a tiny 0.2% of estates are taxed. On the other hand, nearly half of the inheritances in Belgium face taxes.

How Inheritance Tax Works Abroad

The UK’s approach is unusual. Along with Denmark and the US, it’s one of the few places that tax estates once a person has passed away. Most countries elsewhere? They tax those who inherit the money.

Here’s something intriguing: several countries, such as Australia, Canada, and New Zealand, have no inheritance taxes at all. They got rid of them years ago. Why? Because there was a trend of cutting taxes. However, those that still tax inheritances only gain a small chunk of their revenue from it. In the grand tax picture, inheritance taxes play a minor role.

The UK’s Stance on Inheritance Tax

The UK is set to collect roughly £7 billion from inheritance tax this year. While that sounds like a lot, it’s only 0.7% of our total tax earnings. Emma Chamberlain, an expert on inheritance tax, believes our tax is tricky. She says it’s high and overcomplicated, making it hard for those with most of their wealth tied up in property.

But here’s the twist: while the UK’s official inheritance tax rate is 40%, most folks end up paying much less due to various reliefs and exceptions. On average? It’s around 13%. But many still aren’t pleased, thinking 40% is too high.

Can the UK’s System be Improved?

Dan Neidle, a tax expert, believes the UK’s inheritance tax is riddled with problems. He thinks it’s unpopular due to its high rate and loopholes that the wealthy can exploit.

Many experts feel that the UK could rejig its inheritance tax system to be fairer. One suggestion? To end special treatment for certain assets like business shares and homes passed to children. The Institute for Fiscal Studies believes this could boost the UK’s coffers by £4.5 billion.

A major loophole some experts want closed is the exemption for foreign properties. Currently, non-UK residents who have been in the UK for less than 15 years don’t pay IHT on foreign assets. If this is fixed, it could level the playing field.

Neidle summarises it well: “In theory, this tax should impact the wealthiest the most. But in reality, it’s the upper middle class that feel the pinch.”

The Bottom Line

As the UK government mulls over inheritance tax changes, it’s clear there’s a lot to consider. Will they overhaul it for the better? Only time will tell. In the meantime, it’s worth understanding where your wealth stands in this evolving landscape.