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
Donald Trump has finally blinked – but it’s not the stock markets that have forced him to act
Chalk this one up to the bond vigilantes.
This is the term used periodically to describe investors who push back against what are perceived to be irresponsible fiscal or monetary policies by selling government bonds, in the process pushing up yields, or implied borrowing costs.
Most of the focus on markets in the wake of Donald Trump’s imposition of tariffs on the rest of the world has, in the last week, been about the calamitous stock market reaction.
This was previously something that was assumed to have been taken seriously by Mr Trump.
During his first term in the White House, the president took the strength of US equities – in particular the S&P 500 – as being a barometer of the success, or otherwise, of his administration.
Donald Trump in the Oval Office today. Pic: Reuters
He had, over the last week, brushed off the sour equity market reaction to his tariffs as being akin to “medicine” that had to be taken to rectify what he perceived as harmful trade imbalances around the world.
But, as ever, it is the bond markets that have forced Mr Trump to blink – and, make no mistake, blink is what he has done.
To begin with, following the imposition of his tariffs – which were justified by some cockamamie mathematics and a spurious equation complete with Greek characters – bond prices rose as equities sold off.
That was not unusual: big sell-offs in equities, such as those seen in 1987 and in 2008, tend to be accompanied by rallies in bonds.
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What it’s like on the New York stock exchange floor
However, this week has seen something altogether different, with equities continuing to crater and US government bonds following suit.
At the beginning of the week yields on 10-year US Treasury bonds, traditionally seen as the safest of safe haven investments, were at 4.00%.
By early yesterday, they had risen to 4.51%, a huge jump by the standards of most investors. This is important.
The 10-year yield helps determine the interest rate on a whole clutch of financial products important to ordinary Americans, including mortgages, car loans and credit card borrowing.
By pushing up the yield on such a security, the bond investors were doing their stuff. It is not over-egging things to say that this was something akin to what Liz Truss and Kwasi Kwarteng experienced when the latter unveiled his mini-budget in October 2022.
And, as with the aftermath to that event, the violent reaction in bonds was caused by forced selling.
Now part of the selling appears to have been down to investors concluding, probably rightly, that Mr Trump’s tariffs would inject a big dose of inflation into the US economy – and inflation is the enemy of all bond investors.
Part of it appears to be due to the fact the US Treasury had on Tuesday suffered the weakest demand in nearly 18 months for $58bn worth of three-year bonds that it was trying to sell.
But in this particular case, the selling appears to have been primarily due to investors, chiefly hedge funds, unwinding what are known as ‘basis trades’ – in simple terms a strategy used to profit from the difference between a bond priced at, say, $100 and a futures contract for that same bond priced at, say, $105.
In ordinary circumstances, a hedge fund might buy the bond at $100 and sell the futures contract at $105 and make a profit when the two prices converge, in what is normally a relatively risk-free trade.
So risk-free, in fact, that hedge funds will ‘leverage’ – or borrow heavily – themselves to maximise potential returns.
The sudden and violent fall in US Treasuries this week reflected the fact that hedge funds were having to close those trades by selling Treasuries.
More from Sky News:
What a global recession would mean
Is there method to the madness?
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Trump freezes tariffs at 10% – except China
Confronted by a potential hike in borrowing costs for millions of American homeowners, consumers and businesses, the White House has decided to rein back its tariffs, rightly so.
It was immediately rewarded by a spectacular rally in equity markets – the Nasdaq enjoyed its second-best-ever day, and its best since 2001, while the S&P 500 enjoyed its third-best session since World War Two – and by a rally in US Treasuries.
The influential Wall Street investment bank Goldman Sachs immediately trimmed its forecast of the probability of a US recession this year from 65% to 45%.
Of course, Mr Trump will not admit he has blinked, claiming last night some investors had got “a little bit yippy, a little bit afraid”.
And it is perfectly possible that markets face more volatile days ahead: the spectre of Mr Trump’s tariffs being reinstated 90 days from now still looms and a full-blown trade war between the US and China is now raging.
But Mr Trump has blinked. The bond vigilantes have brought him to heel. This president, who by his aggressive use of emergency executive powers had appeared to be more powerful than any of his predecessors, will never seem quite so powerful again.
Is there method to the madness? Donald Trump and his acolytes would have you believe so.
The US president is standing firm among all the market chaos.
Just this weekend, after US stock markets suffered their sharpest falls since the onset of the pandemic, Trump reposted a video on his social media platform Truth Social. This was its title: “Trump is purposefully CRASHING the market.”
Tariffs latest: ‘BE COOL’, Trump says as trade war escalates
The video claimed the president was engineering a flight to US government bonds, also known as treasuries – a safe haven in turbulent times. The video suggested Trump was deliberately throwing the stock market into chaos so investors would take their money out and buy bonds instead.
Why? Because demand for treasuries pushes up the price of the bonds, and that, in turn, lowers the yield on those bonds.
The yield is the interest rate on the debt, so a lower yield pushes down government borrowing costs. That would provide some relief for a government that has $9.2trn of government debt to refinance this year. Consumers also stand to benefit as the US Federal Reserve, the US central bank, would likely follow suit, feeling the pressure to cut interest rates.
A trader works on the floor at the New York Stock Exchange. Pic: Reuters
Trump and his treasury secretary, Scott Bessent, have made it a key policy priority to lower yields. For a while, it looked like the plan was working. As stock markets tumbled in response to Trump’s tariffs agenda, investors ploughed their money into bonds instead.
However, Trump may have spoken too soon. On Monday, the markets had a change of heart and rapidly started selling government bonds. Thirty-year treasury yields hit 4.92% on Wednesday, their biggest three-day jump since 1982. That means government borrowing costs are rising – and not just in the US. The sell-off has spiralled to government bonds worldwide.
Rachel Reeves will be watching anxiously. Yields on Britain’s 30-year government bonds, also known as gilts, hit their highest level since May 1998. They registered a 27 basis point jump to 5.642% today – that’s on track to be the largest one-day move since the aftermath of former prime minister Liz Truss’ “mini-budget” in October 2022.
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‘These countries are dying to make a deal’
This is a big deal. It is the sharpest sell-off in the US bond market since the pandemic. Back then, investors also rushed into bonds before dumping them and the motivations, on one level, are similar.
In 2020, investors sold bonds because they had to cover losses elsewhere in their portfolios. When markets fall, as they have done over the past few days, lenders can demand that an investor who has borrowed money stump up more cash against the value of their loan because the collateral against those loans has fallen in value. This is known as a “margin call”. Government bonds are easy to sell as investors “dash for cash”.
There are signs that this may be happening again and central banks, which had to step in last time, are alert.
The Bank of England warned today of the growing risks to financial stability. “A sharp increase in government bond yields could crystallise relatively quickly,” it said.
There are other forces weighing on government bonds. With policy uncertainty unfolding in the US, investors could also be signalling that US debt isn’t the safe haven it once was. That loss of confidence also seems to have hurt the dollar, one of the world’s safest places to park your money. It’s had a turbulent journey but is down 1.15% against a basket of safe haven currencies since Trump announced widespread tariffs on 2 April.
Some are even wondering if China could be behind some of this, dumping US government debt as a revenge tactic to hurt a president who has explicitly said he wants bond yields to come down. The country holds $761bn of US government bonds, second only to Japan. If this is the case, then the US-China trade war could rapidly be evolving into a financial war.
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