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
MPs to debate emergency law to keep British Steel open as prime minister warns national security ‘on the line’
MPs will today debate emergency laws to save British Steel after the prime minister warned the country’s “economic and national security is on the line”.
Sir Keir Starmer said the future of the company’s Scunthorpe plant – which employs about 3,500 people – “hangs in the balance” after its owner said the cost of running it was unsustainable.
The prime minister said legislation would be passed in one day to allow the government to “take control of the plant and preserve all viable options”.
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MPs and Lords are being summoned from their Easter recess to debate the move and will sit from 11am.
The last time parliament was recalled was on 18 August 2021 to debate the situation in Afghanistan.
The government has been considering nationalising British Steel after Jingye, the Chinese owner, cancelled future orders for iron ore, coal and other raw materials needed to keep the blast furnaces running.
The furnaces are the last in the UK capable of making virgin steel.
Jingye last month rejected a £500m state rescue package – raising fresh doubts about the Lincolnshire plant and fears it could close in the coming days.
The steel from the plant is used in the rail network and the construction and automotive industries. Without it, Britain would be reliant on imports at a time of trade wars and geopolitical instability.
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Inside the UK’s last blast furnaces
In a statement on Friday, Sir Keir said: “I will always act in the national interest to protect British jobs and British workers.
“This afternoon, the future of British Steel hangs in the balance. Jobs, investment, growth, our economic and national security are all on the line.”
The prime minister said steel was “part of our national story, part of the pride and heritage of this nation” and “essential for our future”.
He said the emergency law would give the business secretary powers to do “everything possible to stop the closure of these blast furnaces”.
This includes the power to direct the company’s board and workforce. It will also ensure it can order the raw materials to keep the furnaces running and ensure staff are paid.
The Scunthorpe plant is the last in the UK that can make virgin steel. Pic: Reuters
One of the two blast furnaces at Scunthorpe
Chancellor Rachel Reeves said the government was “taking action to save British steel production and protect British jobs”, while Business Secretary Jonathan Reynolds said the owner had left the government with “no choice”.
Mr Reynolds said Jingye had confirmed plans to close the Scunthorpe furnaces immediately despite months of talks and the offer of £500m of co-investment.
The company said it had invested £1.2bn since taking over in 2020, but that the plant is losing £700,000 a day.
Read more:
Govt intervention in British Steel ‘a remarkable step’ – analysis
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What will happen with British Steel?
Conservative leader Kemi Badenoch said the government had landed itself in a “steel crisis entirely of their own making”.
She said when she was business secretary, she had negotiated a plan with British Steel “to limit job losses and keep the plant running”.
Ms Badenoch said the government had “bungled the negotiations, insisting on a Scunthorpe-only deal that the company has deemed unviable”.
She added: “Keir Starmer should have seen this coming. But instead of addressing it earlier in the week when parliament was sitting, their incompetence has led to a last-minute recall of parliament.”
The Unite union said the prime minister’s recalling of parliament was “absolutely the right thing to do to begin the process of nationalisation”.
While the government hasn’t confirmed those plans, the chancellor also said earlier this week that “all options” are on the table.
Sky News understands accountancy firm EY is being lined up to play a role in a nationalisation process.
The government’s intervention over British Steel comes six months after the last blast furnace was closed at Port Talbot in Wales.
Plaid Cymru has questioned why the government didn’t take similar action there.
The party’s Westminster leader, Liz Saville Roberts, said: “Parliament is being recalled to debate the nationalisation of Scunthorpe steelworks.
“But when global market forces devastated Welsh livelihoods in Port Talbot, Labour dismissed Plaid Cymru’s calls for nationalisation as ‘pipe dreams’.”
Business
MPs to debate emergency legislation to keep British Steel open as ‘security is on the line’
Sir Keir Starmer has said the government will debate emergency legislation on Saturday to keep the British Steel plant in Scunthorpe open as “our economic and national security is on the line”.
The prime minister added that “the future of British Steel hangs in the balance” and legislation will be passed tomorrow to allow the government to “take control of the plant and preserve all viable options” for it.
MPs and Lords are being summoned back from Easter recess to Westminster to debate draft legislation on the plans, and will sit from 11am on Saturday.
The government had been actively considering nationalising British Steel after Jingye, its Chinese owner in Scunthorpe, cancelled future orders for the iron ore, coal and other raw materials needed to keep the last blast furnaces in the UK running.
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Jingye also rejected a £500m state rescue package in a move which raised fresh doubts about the 3,500 jobs at the Lincolnshire plant – with it feared the site would be forced to close as early as next week.
The steel from the plant is used in the rail network and the construction and automotive industries. Without the plant, Britain would be reliant on imports at a time of trade wars and geopolitical instability.
In a short statement delivered from Downing Street this evening, Sir Keir said: “I will always act in the national interest to protect British jobs and British workers.
“This afternoon, the future of British Steel hangs in the balance.
“Jobs, investment, growth, our economic and national security are all on the line.”
One of the two blast furnaces at British Steel’s Scunthorpe operation
‘A new era of global instability’
The prime minister added he has been to the site in Scunthorpe and met the steelworkers there.
He said he understands how “important steel is” to the “whole country” and continued: “It’s part of our national story, Part of the pride and heritage of this nation.
“And I’ll tell you this, it is essential for our future.
“[The government’s] plan for change means we need more steel, not less. So we will act with urgency… This situation and our response is unique.
“While it is true that we’re facing a new era of global instability, our concerns about this plant and negotiations to protect it have been running for years.”
Sir Keir said parliament will be recalled for a “Saturday sitting” and will “pass emergency legislation” in “one day” to give the business secretary the powers to do “everything possible to stop the closure of these blast furnaces”.
He added: “We will keep all options on the table. Our future is in our hands.”
Chancellor Rachel Reeves posted on X after the statement that the government is “taking action to save British steel production and protect British jobs”.
“We are securing Britain’s future,” she added.
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Inside the UK’s last blast furnaces
Tory leader criticises Starmer
Business Secretary Jonathan Reynolds said this evening the Chinese owner of British steel has left the government with “no choice” but to act.
Jingye had confirmed plans to close the blast furnaces at Scunthorpe immediately despite months of talks and the offer of £500m of co-investment from the UK government, Mr Reynolds added in a statement.
It came as Conservative leader Kemi Badenoch said the government has landed itself in a “steel crisis entirely of their own making”.
“As business secretary, I negotiated a modernisation plan with British Steel to limit job losses and keep the plant running, including introducing an electric arc furnace in Teesside, similar to what we did with Tata at Port Talbot steelworks.
“However, the union-led Labour government have bungled the negotiations, insisting on a Scunthorpe-only deal that the company has deemed unviable. Keir Starmer should have seen this coming. But instead of addressing it earlier in the week when parliament was sitting, their incompetence has led to a last-minute recall of parliament.”
She added the government’s attempts to find a solution to the crisis are inevitably “going to cost taxpayers a lot of money”.
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British Steel’s Scunthorpe plant.
Pic Reuters
Meanwhile, the Unite union welcomed Sir Keir’s announcement by saying it is “absolutely the right thing to do to begin the process of nationalisation”.
The government has not confirmed plans to nationalise the company, but like the prime minister this evening, Chancellor Rachel Reeves said earlier this week that “all options” are on the table.
Unite general secretary Sharon Graham said this evening: “I am pleased that the government has listened to representations by Unite and other steel unions over the future of British Steel.
“Ministers could not have allowed a foundation industry to go under with the loss of more than 3,000 jobs and key skills… Discussions have been positive and whilst a longer-term plan needs to be developed, this gives workers the reprieve we have been asking for.”
‘When it was Wales, they mocked’
The government’s intervention over British Steel comes six months after the last blast furnace was closed at Port Talbot in Wales.
Welsh political party Plaid Cymru has questioned why the government did not take similar action to save that steelworks.
The party’s Westminster leader Liz Saville Roberts MP said: “Parliament is being recalled [on Saturday] to debate the nationalisation of Scunthorpe steelworks.
“But when global market forces devastated Welsh livelihoods in Port Talbot, Labour dismissed Plaid Cymru’s calls for nationalisation as ‘pipe dreams’.
“In a real emergency, governments step up to defend their strategic interests. Plaid Cymru recognised the importance of Welsh steelmaking. Labour chose to look the other way.
“When it was Wales, they mocked. Now it’s England, they act.
“Labour has taken Wales for granted for far too long – and the people of Wales won’t forget it.”
The economy performed better than expected in February, growing by 0.5% according to official figures released on Friday, but comes ahead of an expected hit from the global trade war.
The standard measure of an economy’s value, gross domestic product (GDP), rose in part thanks to a suprisingly strong performance from the manufacturing sector, data from the Office for National Statistics (ONS) suggested.
Following the publication of the figures, the British pound rose against the dollar, jumping 0.4% against the greenback to $1.3019 within an hour.
Analysts had been forecasting just a 0.1% GDP hike in the lead-up to the announcement, according to data from LSEG.
Chancellor of the Exchequer Rachel Reeves described the results as “encouraging”, but struck a cautious tone when alluding to US President Donald Trump’s tariffs, and the economic volatility of the past week.
“The world has changed, and we have witnessed that change in recent weeks,” she said.
“I know this is an anxious time for families who are worried about the cost of living and British businesses who are worried about what this change means for them,” Ms Reeves added. “This government will remain pragmatic and cool-headed as we seek to secure the best deal with the United States that is in our national interest.”
But back in February, when Mr Trump was just beginning his second term in office, the UK’s economy looked to be on firmer ground.
Service sectors like computer programming, telecoms and car dealerships all had strong a month, while manufacturing industries such as electronics and pharmaceuticals also helped to drive GDP growth in February.
Car manufacturing also picked up after its recent poor performance.
“The economy grew strongly in February with widespread growth across both services and manufacturing industries,” said Liz McKeown, ONS Director of Economic Statistics.
While motor vehicle manufacturing and retail both grew in February 2025, they remain below February 2024 levels by 10.1% and 1.1% respectively
This aligns with industry data showing year-on-year declines in registrations and manufacturing.
“The UK economy expanded by 0.5% in February, surprising but welcome positive news,” said Hailey Low, Associate Economist at the National Institute of Economic and Social Research.
“However, heightened global uncertainty and escalating trade tensions mean the outlook remains uncertain, with a likely reduced growth rate this year due to President Trump’s “Liberation Day” announcements.”
Ms Low said that this could create a dilemma for Ms Reeves, who would face difficult decisions later in the year when the chancellor presents her next budget.
The latest data also shows a jump from January, when the economy was flat. And compared to the same month a year ago, GDP was 1.4% higher in February 2025.
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