Countries like France, South Korea and Japan expose Britain’s lack of ambition in taxing inheritance, think tank report finds

The UK raises less from inheritance and gift taxes than all but one of the G7 countries who tax inheritance or gifts, highlighting a significant opportunity for the new government to unlock critical funding for its sought-after decade of national renewal, according to a new report from cross-party think tank Demos.

Demos’s analysis also finds that the UK’s system is more regressive than competitor countries like France, South Korea and Japan. Demos argues that the current inheritance tax (IHT) system is therefore “ripe for reform”, and that the government should take inspiration from abroad.

According to recent reports, the Labour government is considering plans to reform inheritance tax in order to ‘unlock’ funds, with a consultation potentially being launched in the autumn.

Demos’s analysis of OECD data finds that, of G7 countries, the UK raised less from inheritance and gift taxes in 2022 than the US, Japan, France, or Germany. France, for example, raised two-and-a-half times as much as the UK (£15.7bn vs £6.7bn). The UK raised more only than Italy - whose inheritance tax is normally charged at just 3%, compared to 40% in the UK - and Canada - who no longer have tax inheritance or gifts.

The UK also taxes a smaller proportion of inheritance and gifts than competitor countries like France, South Korea, and Japan, according to The Future of Inheritance Tax published today by Demos and supported by abrdn Financial Fairness Trust. Around 3.4% of inheritance and gifts passed on in the UK in 2019-20 (the most recent year for which estimates are available) were paid in tax, compared to around 3.9% in France in 2019. If the UK taxed the same proportion as France, we would have netted around an extra £680 million.

The numbers are even starker for others. If we instead taxed the same proportion of inheritance and gifts as South Korea did in 2022, the UK would have raised around £14.1bn in 2019-20 - an additional £9bn on what was actually raised - argues Demos. If we taxed the same percentage of inheritance (excluding gifts) as Japan, we would have raised around £2.1 billion extra.

The UK system is also more regressive than competitor countries, with the wealthiest estates paying lower effective rates (the percentage of all inheritance paid in tax) than others, as they are more able to make use of inheritance tax reliefs. The report finds that:

• France’s tax rates increase even for the top (most valuable) estates, peaking at the top 0.1% based on the available data. In the UK, however, tax rates fall for estates in the top 0.1%.
• In the UK, estates between £2m and £7.5m paid 25% in 2020-21, while those over £10m only paid 17%. In South Korea, meanwhile, the effective rate reached 33% for estates between £6m and £30m, and 44% for those over £30m in 2022.
• In Japan, tax rates increase consistently for the vast majority of estates, decreasing only for estates worth over £46m.
  
  

  The report also finds that the UK’s inheritance tax is unusual when compared to other developed countries in many respects:

• Of all OECD countries, the UK is one of only seven to only apply a flat rate. The UK’s 40% rate is the highest starting rate, equal with the US, but the progressive scales in Japan, Korea, France and Germany all go above 40%.
• The UK is one of only four countries to tax estates rather than receipts (meaning the tax mainly varies depending on how much is given rather than how much is received).
• The UK is unusual among OECD countries in offering 100% uncapped relief for business property and agricultural property, and in not taxing private pensions.

Putting the UK’s approach to inheritance tax in a global context, Demos hopes to demonstrate the full spectrum of options for reform, and shift the debate away from the traditional “cut it or keep it” paradigm.

The think tank also suggests that more work should be done to test the viability and effectiveness of hypothecation - a policy of earmarking taxes to specific spending commitments - which it argues has the potential to significantly expand political support for IHT.

2023 Demos research outlined how over £100 billion is passed across generations each year in the UK in inheritances and gifts. The think tank also commissioned the most in-depth poll to date on public attitudes towards IHT, finding that while initially most people (55%) say that inheritances should always be completely tax-free, when asked what amount of inheritance should be tax-free, only one fifth (21%) say that all inheritance should be tax-free.

Subsequent research, based on the polling as well as focus groups involving more than 100 members of the public, revealed that even those who are initially most negative about IHT are worried that cutting it will hurt public finances, and that the public can be won over on taxing inheritances if the right reforms are put forward.

Dan Goss, Senior Researcher at Demos and author of The Future of Inheritance Tax, said:
“If the new government is looking for ways to unlock public funds, inheritance tax is the right place to start. It is ripe for reform, and countries such as France and South Korea show that there are ways to make it fairer while also raising more money.”
“Whenever a new debate around inheritance tax starts, it’s often reduced to “scrap it or keep it”, but looking at other OECD countries shows there is no shortage of different approaches to taxing inherited wealth.
“If we want to increase public consent for inheritance tax, we need practical reforms that draw on what works best. Policy makers should take confidence in the fact that other countries show more effective models are available.

Mubin Haq, CEO of abrdn Financial Fairness Trust, said:
“In a number of ways the UK is an outlier when it comes to taxing inheritance. Compared to a range of other countries, we don’t tax those with the most to pass on. The wealthiest estates are able to make use of a range of reliefs which reduces faith in the system.
“International examples highlight the way we can increase fairness and raise more funding for our cash-strapped public services.”

Read the report