The Death Tax

Britain's inheritance tax has a headline rate of 40 per cent. That number, and almost nothing else about the tax, is straightforward.

The rate applies only to assets above the nil-rate band of £325,000, a threshold frozen since April 2009 and confirmed at that level until at least April 2031. On paper, a couple leaving a home to their children can shelter up to £1 million through the combination of the nil-rate band and the residence nil-rate band introduced in 2017. An estate just over that threshold, caught by house price inflation and without access to professional planning advice, hands 40 pence on every excess pound to HMRC, while one worth £10 million, carefully managed through trusts, agricultural land and business property, pays around 10 per cent. The IFS has documented this inversion and the Treasury's own liability statistics confirm it, yet the structure has remained unchanged.

The nil-rate band has sat at £325,000 through Conservative and Labour administrations alike, now extended until at least April 2031. Had it risen with CPI since 2009, it would stand at roughly £530,000 today.

Over those sixteen years, average house prices in England roughly doubled. The consequence is mechanical: estates that would have cleared the threshold in 2009 now sit inside it, not because Parliament voted to extend the tax to new groups, but because it voted to do nothing while asset prices rose. In 2022–23, 31,500 estates paid IHT, representing 4.62 per cent of all deaths that year. The OBR projects that proportion to keep climbing through the decade.

IHT raised £8.2 billion in 2024–25, a record, and the OBR forecasts £9.1 billion in 2025–26. Against total UK tax receipts of around £1.1 trillion, that is 0.7 per cent. For a tax generating as much political heat as any levy in Britain, the yield is modest by any comparison.

That 0.7 per cent underwrites a substantial private industry whose costs are not measured. In 2024, HMCTS issued approximately 265,000 grants of probate in England and Wales. Of those, around 31,500 estates actually paid IHT in the most recent full year, roughly 13 per cent of all grants. The remaining 233,000 still had to calculate their liability, take legal advice and establish in writing that they owed nothing. The threshold is low enough that most estates of any complexity require professional guidance to confirm they are exempt.

The Wealth Tax Commission estimated probate costs at £22,800 for medium-complexity estates and £68,700 for highly complex ones. The total private cost of complying with, planning around and administering inheritance tax is not published anywhere. HMRC does not measure it. No official body has aggregated it. The tax raises £8.2 billion. The denominator is unknown.

The mechanisms of avoidance are legal, well-advertised and priced into the advice industry that has grown up around the tax. Discretionary trusts remove assets from an estate while retaining family control. Agricultural property relief shielded qualifying farmland entirely until the 2024 budget changes. Business property relief does the same for qualifying business assets. The seven-year rule on gifts allows systematic stripping of an estate for anyone with the foresight and longevity to use it.

The cumulative result, as the IFS has measured: estates between £1 million and £8 million pay around 20 per cent; those above £10 million pay around 10 per cent. The wealthiest estates are the best-served by an avoidance industry that the threshold freeze has largely priced out of reach for the family sitting on a paid-off house in Guildford.

The structure of IHT generates three documented behavioural responses, none of them intended by the policy.

In October 2024, Rachel Reeves announced that agricultural property relief would be capped at £1 million of combined qualifying assets, with an effective rate of 20 per cent applying above that threshold. Thousands of farmers gathered in Parliament Square the following month. After sustained pressure the government raised the threshold to £2.5 million in December 2025.

The episode illustrated a pattern that recurs throughout the history of IHT reform. Every relief has a constituency because every relief was created by a government that decided a particular asset class should pass between generations intact. Removing exemptions one by one tends to catch whoever holds the newly-ineligible asset while leaving more sophisticated structures untouched.

From April 2027, unused pension funds are drawn into IHT calculations for the first time. The Treasury's estimate of 10,500 newly liable estates a year is almost certainly low. It captures the first wave: people who die in 2027 and 2028 with pension pots their executors were not expecting to declare. It does not capture the larger group still alive, still accumulating, whose entire estate plan was built on advice that is now wrong.

For the past two decades, financial advisers have recommended the same strategy to anyone with both pension and non-pension assets: spend the ISAs and savings first, leave the pension untouched, pass it to the next generation free of IHT. Millions of people followed that advice. Many of them have not yet been told the strategy no longer works. Their wills were drafted on the old rules. Their estate valuations do not include the pension. The gap between what they think their IHT exposure is and what it will actually be is, for some families, six figures.

The UK is in a shrinking minority. Australia abolished estate duty in 1985. Canada in 1972. Sweden, whose total tax burden as a share of GDP remains among the highest in the developed world, abolished inheritance and gift tax in 2005 by unanimous vote of the Riksdag, partly driven by evidence that IHT was accelerating the sale of Swedish family firms to foreign buyers. New Zealand, Hong Kong and Singapore have no equivalent. The United States levies estate tax only above $13.6 million.

The economic case that persuaded these governments (that the tax penalises saving, distorts allocation toward tax-efficient rather than productive assets, generates compliance costs disproportionate to its yield and encourages capital flight) was not an argument particular to low-tax political traditions. Sweden's unanimous abolition is the data point that most consistently goes unmentioned in British policy debate.

The IHT bill is due within six months of the end of the month in which the person died. Not six months after probate. Not six months after the estate is settled. Six months from death, while the family is still administering the estate, often before they have legal access to the assets needed to pay it.

The catch-22 is structural. To obtain probate, in many cases you need to have paid, or arranged to pay, the IHT. To pay the IHT, you need access to the estate. Banks will sometimes release funds directly to HMRC under a direct payment scheme, but not all assets qualify and not all institutions cooperate. Where liquid assets are insufficient, families must arrange bridging finance to pay a tax bill on an inheritance they have not yet received. The executor is personally liable if the calculation is wrong.

IHT is consistently the most unpopular tax in Britain. A YouGov survey in 2025 found 76 per cent of respondents opposing any increase in the current rate, up from 69 per cent the year before; more than half support abolition outright. The polling holds across party lines and does not weaken when respondents are told that fewer than 5 per cent of estates actually pay the tax.

The most common objection, cited by 42 per cent of respondents, is double taxation. The sequence runs: income taxed when earned, National Insurance deducted before it clears the payslip, taxed again as it accumulated in savings or property, stamp duty paid on the way into the house, council tax paid every year the house existed, capital gains tax if it was ever sold and IHT on whatever remained. The same pound can be taxed at five or six separate events across a lifetime. The data suggest that public opposition reflects understanding of the tax rather than misunderstanding of it.