The Future of Inheritance Tax: Options to repair inheritance taxation in Britain

The new Labour government are promising change for the country. Unfortunately, given the current fiscal environment, they have very little money available to deliver that. Reports suggest they are looking at changes to inheritance tax as a way to unlock more public funds. We think this is the right place to start.

Inheritance tax is poorly designed and ripe for reform. But also, with inheritances becoming increasingly important in our economy, and very few inheritances – only the most valuable – charged any tax, reforms could make a big difference for the country while bearing no cost on the vast majority of people.

Alongside raising public funds, we also need to address the public’s concerns about inheritance tax. To do so, we must make it fairer, simpler and more transparent. To deliver these improvements, the UK can learn lessons from overseas, where the taxation of inheritances has been reformed and structured differently. This paper lays out those many lessons based on a review of UK and
international evidence, and interviews with a series of policy experts.

KEY FINDINGS
Our analysis indicates that the UK could potentially increase revenue, progressivity, and public support simultaneously. In particular, on the economics, we should learn from the South Korean system:

• We could raise more revenue. While in the UK, around 4.2% of inheritance passed on in 2019-20 was paid in tax, the figure in South Korea was 9.7% in 2022 (after discounting the inheritance of Samsung, which incurred an anomalously large tax bill). If taxing the same proportion of inheritance in 2019-20, the UK government would have raised around £11.6bn – an additional £6.5bn compared to what it actually raised. If also taxing the same proportion of lifetime wealth transfers as South Korea (9.1%), we would have raised an additional £2.5bn on top.

• We could make our system fairer. In the UK, the wealthiest estates tend to pay lower effective rates (the percentage of all inheritance paid in tax). Those worth between £2m and £7.5m paid 25% in 2020-21, while those over £10m only paid 17%. In South Korea, meanwhile, the effective rate reached 33% for estates between £6m and £30m, and 44% for those over £30m in 2022.