An overhaul of the inheritance tax system is being considered, with experts proposing an expansion to include a greater number of estates. The think-tank Demos has put forward this suggestion in order to ensure adequate funding for public services, asserting that the increasing significance and value of inheritances make it imperative for the government to reassess the current tax system. According to their report titled “The Future of Inheritance Tax,” only 3.7 percent of deaths in the UK in 2020-2021 resulted in an inheritance tax charge, a significantly lower percentage compared to countries like South Korea and Japan.
In the UK, estates valued at more than £325,000 are subject to a flat rate of 40 percent tax on any amount exceeding that threshold. However, there are exemptions in place, such as leaving everything above the threshold to a spouse or civil partner, and increasing the threshold to £500,000 if the estate is given to children or grandchildren. Various methods to avoid inheritance tax also exist, including transferring wealth at least seven years before death and exemptions for private pensions, certain types of investments, and farmland.
The think tank has suggested that by adopting a system similar to that of South Korea, the UK government could potentially raise an additional £9 billion each year. Senior researcher at Demos, Dan Goss, emphasized the need for change, particularly in the current fiscal environment. He contended that changes to inheritance tax could generate substantial public funds without impacting the majority of individuals. Goss also highlighted the potential to make the tax regime fairer, simpler, and more transparent while closing loopholes that allow the wealthiest families to minimize their tax liabilities.
Demos has proposed several options for reform and has pointed to South Korea’s model, where 9.7 percent of inheritance was taxed in 2022, compared to 4.2 percent in the UK in 2019-20. The think tank also suggested the possibility of scrapping inheritance tax altogether and replacing it with a system of capital gains tax on death, similar to what Norway has implemented.
The 40 percent tax rate on estates exceeding the threshold has been a contentious issue, with individuals and families finding ways to mitigate their tax liabilities. The think tank’s proposal aims to address this imbalance and ensure that everyone pays their fair share.
In conclusion, the call to extend inheritance tax to more estates is gaining traction, with experts and think tanks advocating for a fairer and more robust system. The proposed changes would not only generate much-needed revenue for public services but also ensure that the tax system is equitable for all. As discussions around inheritance tax continue, it is essential to consider these proposals to create a more ambitious and hopeful vision for reforming inheritance tax in the UK.