Inheritance tax: who’s paying it, how much is it generating and is it just the rich who benefit from its abolition?
With political party conference season upon us and the Tories scrambling for ways to appeal to voters and lessen Labour’s lead in the polls, abolishing inheritance tax has again been floated as the next government giveaway.
So, how many people are paying inheritance tax and how much are they paying: will abolition allow grieving loved ones to save thousands or is this a boon to the homeowning Tory base?
Or is this just a sensible policy measure benefitting both groups, given house prices are still more expensive than they were before the pandemic and inflation stood for months in double digit territory?
With widespread dislike of inheritance tax, the incorrect belief among taxpayers that they’ll fork out because of the toll, calls for abolition and reform coming from all corners, yet only small percentages of assets being affected by the charge, Prime Minister Rishi Sunak may have landed on a policy that few would miss in its current form.
It is after all what Tories call the “most hated tax”.
While only a small percent pay inheritance tax, new data from the Institute for economic research, Fiscal Studies (IFS) says the sums could be significant to some: if all non-spousal inheritances transferred next year were equally shared between all 25 years olds, each would receive around £120,000.
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The prime minister refused to comment on inheritance tax “speculation”.
How many are paying?
Latest available figures from the tax man, His Majesty’s Revenue and Customs (HMRC), show 27,000 estates paid inheritance tax in the year 2020 to 2021. An estate encompasses a person’s assets: their house, any jewellery or other valuables they might own. Though inheritance tax isn’t paid on pension and insurance money.
For context, more than half a million (577,160) people died in England and Wales in 2022.
Essentially, less than 4% (3.73%) of estates paid inheritance tax in the 2020 to 2021 year.
And the number of estates paying inheritance tax is up by 4,000 people since the previous tax year, 2019 to 2020, as the numbers of people who died increased during the COVID-19 pandemic.
What are they paying?
At present, inheritance tax is charged at 40% and applies to estates worth more than £325,000. There are, however, allowances that can mean its only paid on more valuable estates.
If a main residence is being passed to children or grandchildren a £175,000 allowance is added, meaning only amounts of £500,000 are subject to inheritance tax. Married couples can share that allowance, doubling it and allowing a £1m estate to be passed on to children tax free.
Sunak is said to be looking at reducing the levy in the budget in March, working towards an eventual abolition.
Official HMRC statistics show £5.76bn of inheritance tax liabilities were racked up in the 2020 to 2021 tax year. This was higher than usual – to the tune of £800m, a 16% increase – as COVID-19 caused a greater number of deaths that year.
This year more than £3bn has been generated in just four months, provisional HMRC figures showed, and June broke the monthly record.
While new highs of inheritance tax are coming in, other forms of wealth tax, like capital gains tax (CGT) – the levy on things like income from a second property or shares – are also reaching new highs, greater than inheritance tax.
CGT added £16.7bn to the public purse in the 2021 to 2022 tax year and came from 94,000 taxpayers, HMRC said.
Meanwhile the inheritance tax take from April to August this year was £3.2bn, £300m higher than in the same period a year earlier as asset values have increased and rate rises meaning more interest is charged on late payments to HMRC.
It is worth noting that tax receipts are up across the board. This is not unique to inheritance tax.
A combination of higher wages and more expensive goods (again, due to inflation) meant income tax, national insurance and capital gains tax yields were up. Overall HMRC said £19.8bn more was taken in from April to August this year than last, adding up to a total of £331.1bn.
The cost of abolition is £7bn, according to analysis from the IFS.
Who’s paying?
Notionally people passing on estates worth more than £500,000 would pay, but the figures demonstrate only a smaller number of people, in practise, do.
In theory, rich people’s estates should be inheritance taxed but there are ways around paying. People with legal or tax advisers can limit their liability.
For example, gifts of up to £3,000 in value can be given tax free. This may be possible for (and benefit) a wealthier person giving away collectors items but not a middle income earner passing on the family home.
But commentators say the exchequer could get even more from inheritance tax soon.
Research from investment service provider, Wealth Club, says the number of people paying inheritance could rise by 50% in a decade and £9bn could be yielded by 2029.
“The combination of rising house prices and inflation will push up both the number of families paying inheritance tax and the amount they pay”, said Nicholas Hyett, Investment Manager at Wealth Club.
The IFS goes one further in its new analysis and says around £15bn could be gathered from inheritance tax in a decade’s time.
Who would benefit from inheritance tax cuts?
People who may not think of themselves as wealthy, have come in scope of inheritance tax. These people could benefit as house prices have grown and the recent inflation cycle brought prices up.
Inheritance tax bands have been frozen since 2009 and they’re not due to be revised until 2028 even though most prices haven’t stayed at 2009 levels.
Those who didn’t have a spouse to share tax credits with or who do not wish to pass their estate to a child or grandchild, missing out on the exemptions in the process, are the kinds of people in line to benefit.
Research by the IFS says around half (47%) of the benefit of banning inheritance tax would go to those with estates of £2.1m or more, who represent the top 1% of estates.
That group would benefit from an average tax cut of around £1.1m, IFS figures show. The vast majority (roughly 90%) of estates not paying inheritance tax would not be directly affected by the ban.
Who would not benefit, according to the IFS, are people without assets. By the time inheritances arrive, the think tanks says, wealth inequalities are already well entrenched and hard to undo.
In other words, unless you already have rich parents, inheritance tax isn’t much good to you.
The question of whether binning this policy is designed to benefit people like Rishi Sunak, who are wealthy, depends on what the tax is replaced with, or not.
Why might it be in line for the scrap heap?
Inheritance tax is widely disliked.
Despite the data showing less than 4% of estates end up paying the levy, the public believe they’ll be affected, according to YouGov polling done for The Times.
Nearly a third (31%) of survey participants thought their assets will be valuable enough to pay inheritance tax and 15% thought they themselves would have to pay the tax on things they inherit.
Just 5% said the threshold for inheritance tax was £1m.
That’s not to mention the objections of politicians. It’s not the first time the Conservatives have tried to scrap the toll. Not three months have passed since the last time Tories flew this particular policy kite.
Labour in recent days have been staunch in their opposition to getting rid of inheritance tax but only because it is an unfunded tax cut.
Even left leaning think tank, the Resolution Foundation, and the IFS, want the tax gone.
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What’s happening with inheritance tax?
Alternatives
Both the Resolution Foundation and the IFS have ideas about what should fill its place.
For its part the Resolution Foundation proposes a lifetime allowance for everyone. Each person can inherit up to £125,000 over the course of their life and after that you should pay a tax rate of 20% on what you get for anything up to £500,000, for anything higher than half a million received after the £125,000 cut off, a tax rate of 30% should be applied.
Gifts and assets transferred between spouses should be exempt, the foundation proposes.
The financial benefits would better than inheritance tax as it currently stands, according to analysis the think tank has done: £5bn more could be collected a year, compared to the amount gathered in the 2020 to 2021 year. That would equate to tax revenues of £11bn.
Another positive, the Resolution Foundation says, is everyone has a lifetime benefit and so wealth is more likely to be spread around, among families for instance.
A further option, proposed by the Wealth Club, is to keep the tax as is but just raise the points at which you’re taxed in line with inflation.
Either way, voters are unlikely to hear an announcement on the tax future until Sunak’s Tory Party conference speech in early October or the government’s autumn statement in November.
Sources have told Sky News that, despite reports, no changes will be made this year.
Business
In Halifax’s night-time economy, no one is holding back over what is required in the budget
In the upstairs bar of a slick new brewery, the cheese-lovers of Halifax are paying “homage to fromage”.
It is one of the first events in the historic West Yorkshire town for the monthly cheese club and there is a decent turn-out.
Sky News visited Halifax’s clubs, bars and restaurants to get an insight into people’s priorities
The night-time economy in Halifax is a useful measure of how the landscapes of our town and cities have changed
Discussion of Wednesday’s budget is not as popular as an accompaniment to the cheese as the selection of wines. But no one holds back on what is required of the chancellor.
Natalie Rogers, who runs her own small business with her partner, said there needs to be focus.
Small business owner Natalie Rogers wants to see more investment in local industries
“I think investing in small businesses, investing in these northern towns, where at one time we were making all the money for the country, can we not get back to that? We’re not investing in local industries.”
At the next table, with a group of friends, Ali Fletcher said there needs to be bigger targets.
“I think wealth inequality is a major problem. The divide is getting wider. For me, a wealth tax is absolutely critical. We need to address this question of ‘Is there any money left?’. There’s plenty of money, it’s all about choices that government make.”
At this monthly cheese club, people told us about their priorities ahead of the budget
The evening’s cheese tasting was being marshalled by Lisa Kempster. “The impression I get from talking to people is there’s a lot of uncertainty, but when you ask them what they’re uncertain about, they’re not really sure, there’s just a general feeling of uncertainty and being cautious.”
Ali Fletcher reckons wealth inequality is a major problem
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Budget will be big – and Starmer has some serious convincing to do
Reeves vows to ‘grip the cost of living’
What tax rises could chancellor announce?
This corner of Halifax, close to the town’s historic Piece Hall, is buzzing with clubs, bars and restaurants, trying hard to defy the crunch in the night-time economy. It is a useful measure of how the landscapes of our town and cities has changed.
“Whenever there’s a budget, for a few days afterwards, there’s a drop off in trade,” said Michael Ainsworth, owner of the Graystone Unity, a bar and music venue in the town.
“I accept the government needs to raise money but, in this day and age, there’s better ways to go about doing that, like closing tax loopholes for the huge businesses to operate up with banking arrangements outside the UK.”
Michael Ainsworth owns a bar and music venue and thinks the chancellor needs to close tax loopholes
In the bar, a folk singer is going through a quirky and caustic set. In the basement, a punk band called Edward Molby is considerably louder.
On a sofa in the main bar, recent graduates Josh Kinsella and Ruby Firth, newly arrived in Halifax because of its more affordable housing, pinpoint what they want on Wednesday.
“Can we stop triple-locking the pensions, please? Stop giving pensioners everything. For God’s sake, I know they have hard times in the 70s and the 80s, but it just feels like we’re now paying for everyone else.”
Josh Kinsella and Ruby Firth feel there’s too much focus on pensioners
Ben Randm is a familiar face at the bar and well known on the music scene with his band, Silver Tongued Rascals.
“Everyday people are seen as statistics, we’re always the afterthought. When the cuts are done, we’re always impeded and the ramifications that has for people’s livelihoods, for people’s mental health, for people’s passion and drive… it’s such a struggle.”
He, like many in the night-time economy sector, wants extra help for hospitality and venues that, he says, provide a vital community link.
Ben Randm who has his own band reckons everyday people are ‘always the afterthought’
David Van Gestel chose Halifax to open the third branch of MAMIL, a bar in jokey honour of those cycling “middle-aged men in Lycra”. On a busy quiz night, he said venues had to provide something different to get people out of their homes.
“I think the government needs to start putting some initiatives in place. They talk about growth but the reality is that the only thing we’re seeing grow is our costs.”
There’s a lot going on at TikTok right now.
As well as online safety updates and new features, the company is introducing sweeping changes to how it moderates the platform’s content.
At the same time, there’s an intense focus on online safety, particularly here in the UK.
With all that going on, Sky News got a rare, exclusive sit-down with one of TikTok’s senior safety executives, Ali Law.
The increasing role of artificial intelligence
One of the biggest changes happening at TikTok is around artificial intelligence.
Like most social media companies, TikTok has used AI to help moderate its platform for years – it is useful for sifting out content that obviously violates policies, and TikTok says it now removes around 85% of violative content without getting a human involved.
File pic: Reuters
Now, it is increasing its use of AI and will be relying less on human moderators. So what’s changed that means TikTok is confident AI can keep young users safe?
“One of the things that has changed is really the sophistication of those models,” said Mr Law, who is TikTok’s director of public policy and government affairs for northern Europe. He explained that AI is now better able to understand context.
“A great example is being able to identify a weapon.”
Whereas previous models may have been able to identify a knife, newer models can tell the difference between a knife being used in a cooking video and a knife in a graphic, violent encounter, according to Mr Law.
“We set a high benchmark when it comes to rolling out new moderation technology.
“In particular, we make sure that we satisfy ourselves that the output of existing moderation processes is either matched or exceeded by anything that we’re doing on a new basis.
“We also make sure the changes are introduced on a gradual basis with human oversight so that if there isn’t a level of delivery in line with what we expect, we can address that.”
Human moderator jobs being cut
That increasing use of AI means TikTok will rely less on its network of tens of thousands of human moderators around the world.
TikTok moderators and union workers protested outside the company’s London headquarters over job cuts
In London alone, the company is proposing to cut more than 400 moderator jobs, although there are reports a number of those jobs will be rehired in other countries.
On 30 October, Paul Nowak, general secretary of the TUC union, said “time and time again” TikTok had “failed to provide a good enough answer” about how the cuts would impact the safety of UK users.
Ali Law speaks to Sky News from TikTok’s European headquarters in Dublin
When Sky News asked if Mr Law could ensure UK users’ safety after the cuts, he said the company’s focus is “always on outcomes”.
“Our focus is on making sure the platform is as safe as possible.
“We will make deployments of the most advanced technology in order to achieve that, working with the many thousands of trust and safety professionals that we will have at TikTok around the world on an ongoing basis.”
Dame Chi Onwurah speaks at the House of Commons. File pic: Reuters
The UK’s science, technology and innovation committee, led by Labour MP Chi Onwurah, has issued a probe into the cuts, with Ms Onwurah calling them “deeply concerning”.
She said AI “just isn’t reliable or safe enough to take on work like this” and there was a “real risk” to UK users.
However, Mr Law said that, as a parent himself, he is “also highly concerned and highly interested in issues of online safety”.
“That’s why I’m so confident in the changes that we are making at TikTok in terms of content moderation as a whole,” he said.
“The power really comes in the combination of the best technology and human experts working together, and that still is the case at TikTok and it will be going forwards as well.”
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UK’s online safety rules: One month on
New wellness tools
The interview came at the end of an online safety event at TikTok’s Dublin office, its European headquarters.
During the conference, the company announced a number of new features designed to increase user safety, including a new in-app Time and Wellbeing hub for TikTok users.
The hub is designed with the Digital Wellness Lab at Boston Children’s Hospital and gamifies mindfulness techniques like affirmations, not using TikTok during the night and lowering your screentime.
Ali Law, TikTok’s director of public policy and government affairs for northern Europe
Read more from Sky News:
Meta to block Instagram and Facebook for users under 16 in Australia
Half of novelists fear AI will replace them entirely, survey finds
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Cori Stott, executive director of the digital wellness lab, said many people use their phones to “set their wellbeing, to reset their emotions, to find these safe spaces, and also to find entertainment”.
The hub was built as part of the TikTok app because young people want wellness tools “where they already are”, without needing to go to a different app, she said.
Still, there are plenty of reports suggesting that phone use and social media has a damaging effect on young people’s mental health… is TikTok trying to solve a problem of its own creation?
“If you are a teen on the app, you will load up and find that you have, if you’re under 16, a private profile, no access to direct messaging, a screen time limit set at an hour, [and at] 10pm sleep hour suggestion,” said Mr Law.
“So the experience is one that does try and promote a balanced approach to using the app and make sure that people have the options to set their own guardrails around this,” he said.
“I think the other thing I’d say is that the content on TikTok is, in the main, inspiring, surprising, creative.”
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