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.
Inflation unexpectedly fell to 2.5% in December, following two consecutive months of increases.
Today’s inflation rate is above the Bank of England’s 2% target but lower than the forecast of 2.6% by economists.
This means that prices are still rising but at a slower pace than before.
Read more:
Inflation falls slightly after two months of rises
But how does all of this affect the cost of groceries, clothing and leisure activities? Use our calculator to find out.
Which prices are increasing fastest?
Hair gel was the item with the largest price increase, with prices for 150-200ml rising by more than a third from £3.04 to £4.08.
The cost of olive oil also continues to rise. Prices for 500ml to one litre have risen from £7.40 to £9.11, an increase of 23%.
Olive oil has consistently had high price increases and experts have put that price rise down primarily to poor olive yields due to last year’s heatwaves in southern Europe.
However, they expect a significantly better harvest in the 2024-25 season, thanks to significant rainfall in Spain. The harvest could be double the size of last year’s, which may lead to lower prices in the coming months.
Food and drink products are responsible for seven of the 10 biggest increases since last year.
Top five price rises:
• Hair gel (150-200ml): up 34%, £3.04 to £4.08
• Olive oil (500ml-1litre): up 23%, £7.40 to £9.11
• Large chocolate bar: up 23%, £1.73 to £2.12
• White potatoes (per kg): up 20%, 74p to 89p
• Iceberg lettuce (each): up 20%, 82p to 98p
Overall, 45 of the 156 types of food and drink tracked by the ONS have actually become cheaper since last year.
Crumpet lovers have reason to celebrate. Prices for a pack of 6-9 crumpets have dropped by 9%, while another breakfast favourite, peanut butter, has seen an 8% drop.
Overall, 139 out of the 444 products in our database are cheaper than they were 12 months ago.
Top food price decreases:
• Pulses (390-420g): down 12%, 76p to 67p
• Crumpets (pack of 6-9): down 9%, £1.01 to 92p
• Peanut butter (225-350g): down 8%, £2.18 to £2.00
• Mayonnaise (390-500g / 420-540ml): down 7%, £2.20 to £2.04
• Canned tomatoes (390-400g): down 7%, 70p to 65p
Among non-supermarket items, kerosene has seen the largest price drop, falling by 17%.
What is the effect of long-term inflation?
The price changes described above compare the cost of items to where they were a year ago.
However, inflation has now been at high levels for an extended period of time.
The war in Ukraine, COVID, Brexit, and other supply chain pressures have all contributed to spiralling costs in recent years.
Inflation reached a 40-year high of 11.1% in October 2022.
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While the headline inflation figure has come down markedly, any amount of inflation means that prices are still rising, and building on already inflated costs.
We’ve compared the costs of shopping items with what they were three years ago to see what the cumulative impact of inflation has been.
The biggest price rise for groceries over that time has been for olive oil (500ml to one litre), which has increased nearly two-and-a-half times (150%), from £3.64 to £9.11 in the past three years.
Iceberg lettuce is up by four-fifths, with one costing 98p now compared with 54p in December 2021.
Use our calculator to see how much prices in your shopping basket have risen in total since three years ago.
Who is worst affected?
Richard Lim, chief executive of Retail Economics, says: “It’s the least affluent households that are going to see much higher rates of inflation as they spend more of their income on food and energy.”
We’ll continue to update our spending calculator over the coming months so you can see how you’ll be affected.
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Methodology
The ONS collects these prices by visiting thousands of shops across the country and noting down the prices of specific items. There are upwards of 100,000 prices published every month, from more than 600 products.
The items that form the “official shopping basket” change each year to reflect how the purchasing habits of the population have changed. For example in March 2021, after a year of the pandemic, hand gel, loungewear bottoms and dumbbells were added, while canteen-bought sandwiches were among the items removed.
Where there aren’t the exact equivalent items available at a survey shop, ONS officials pick the best alternative and note that they’ve done this so it’s weighted correctly when the averages are worked out.
Shops are weighted as well, so the price in a major chain supermarket will have a greater impact on the average than an independent corner shop.
We will be updating these figures each month while the cost of living crisis continues.
During the pandemic, more of the survey was carried out over the phone and work is ongoing to digitise the system to be able to take in more price points by getting data from supermarket receipts, rather than making personal visits.
Data journalists: Daniel Dunford, Amy Borrett, Ben van der Merwe, Joely Santa Cruz and Saywah Mahmood
Interactive: Ganesh Rao
Design: Phoebe Rowe, Brian Gillingham
The Data and Forensics team is a multi-skilled unit dedicated to providing transparent journalism from Sky News. We gather, analyse and visualise data to tell data-driven stories. We combine traditional reporting skills with advanced analysis of satellite images, social media and other open-source information. Through multimedia storytelling, we aim to better explain the world while also showing how our journalism is done.
There’s been a surprise fall in inflation to 2.5% after two months of rises, official figures show.
It means prices are still rising but at a slower pace than before, according to Office for National Statistics (ONS) data for December.
Economists had expected the figure to remain at 2.6%, the level recorded in November.
Inflation is still above the 2% target of interest rate setters at the Bank of England but exactly as they had forecast in November.
What does it mean for interest rates?
It means there is more chance of an interest rate cut when the Bank’s rate-setting Monetary Policy Committee meets in three weeks’ time.
Before the inflation announcement markets thought there was a 62% chance of a cut but following the release that rose to 83%.
Beyond the headline consumer price index (CPI) measure of inflation are more figures that will be welcome news for the Bank and for Chancellor Rachel Reeves who has faced increasing pressure over her handling of the economy.
Two metrics closely watched by the Bank fell more than expected.
The persistently high services inflation, which is impacted by rising wages, fell from 5% a month before to 4.4%, far below the 4.9% forecast by economists.
Similarly core inflation – which tracks price rises without energy and food which can be volatile – dropped to 3.2% from 3.5% in November.
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Sky’s Kay Burley speaks with chief secretary to the Treasury Darren Jones about the latest inflation figures.
Inflation data takes on outsized significance in determining the likelihood of a rate cut as the ONS’s labour force data, which assesses the health of the jobs market, has by its own admission been unreliable.
Why has the inflation rate come down?
Inflation was slowed by restaurants and hotels putting up their prices by less than before. Tobacco prices also rose less than the same month a year earlier.
Acting to push up inflation was the growing cost of fuel and second-hand cars.
Much-needed good news
Wednesday’s data brings much-needed good news for the chancellor who has faced criticism over her handling of the economy after a week of market turmoil brought the pound down and government borrowing costs up.
Borrowing costs came down and the pound, which can measure investor confidence in the UK economy, was up to $1.22.
Responding to the data Ms Reeves said: “There is still work to be done to help families across the country with the cost of living. That’s why the government has taken action to protect working people’s payslips from higher taxes, frozen fuel duty and boosted the national minimum wage.”
Business
Chancellor Rachel Reeves accused of refusing to ‘face up to her own failures’ amid market turmoil
Chancellor Rachel Reeves has been accused of refusing to “face up to her own failures” by “jetting off to Beijing” during a week of market turmoil.
Shadow chancellor Mel Stride accused the chancellor of ducking difficult questions as the “government was losing control of the economy” while Ms Reeves visited China over the past week with a delegation including the governor of the Bank of England and the heads of HSBC, Standard Chartered and Schroders.
On Monday, both long-term 30-year and 10-year government borrowing costs rose, with the 30-year effective interest rate (the gilt yield) reaching a new high of 5.47% – a rate not seen since mid-1998.
The pound also hit a 14-month low, prompting questions over the chancellor’s future.
Politics latest: Chancellor defends her records
She received a slight reprieve on Tuesday morning as the pound recovered some loss and ticked up slightly to $1.22, while government borrowing costs dipped slightly.
But the Conservatives used Ms Reeves’s absence over the past week to attack her, with Mr Stride telling the Commons: “While the government was losing control of the economy, where was the chancellor?
“Her trip to China had not even begun when my urgent question was taken in the House last week, she was still in the country, but she sent the chief secretary rather than face up to her own failures.
“So can I ask (Rachel Reeves) why she chose not to respond herself? The chancellor, of course, ducked the difficult questions by jetting off to Beijing.
“I believe that in Labour circles, they are calling it the Peking duck.”
Chinese Vice President Han Zheng with Rachel Reeves in Beijing during her visit. Pic: AP
But Ms Reeves dismissed the criticism and vowed to stick to the fiscal rules she set out in the October budget – to get day-to-day spending through tax receipts and get debt down as a share of the economy.
“We remain committed to those fiscal rules and we will meet them at all times,” she said.
She also defended her trip to China, saying engaging with countries around the world will “deliver growth”, and said she brought up human rights issues with China.
“Leadership is not about ducking these challenges, it is about rising to them,” she told the Commons.
“And the economic headwinds that we face are a reminder that we should, indeed we must go further and faster in our plan to kickstart economic growth that plunged under the last government.”
Read more:
UK and China selling new economic relationship as a win-win – but it’s complicated
Anti-corruption minister faces new investigation in Bangladesh
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Why is the UK economy in big trouble?
The chancellor said her trip to China has meant greater access to the Chinese market for British firms and helped safeguard the UK’s national security.
New agreements were made on vaccine approvals, fertiliser, whisky labelling, legal services, automotives and accountancy to “unlock £1bn of value for the UK economy”, she said.
Ms Reeves said she raised the case of imprisoned British citizen and media tycoon Jimmy Lai with every minister she met in China.
She said she also raised concerns about Russia’s war in Ukraine, human rights, restrictions on rights and freedoms in Hong Kong and the “completely unjustified sanctions against British parliamentarians”.
“A key outcome of this dialogue is that we have secured China’s commitment to improve existing channels so that we can openly discuss sensitive issues and the ways in which they impact our economy because if we do not engage with China, we cannot raise our real concerns,” she said.
“This dialogue is just one part of our engagement with trading partners right across the world.”
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