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Overview

Inheritance Tax (IHT) applies at a flat rate of 40% to estates worth over £325,000. This 40% rate has extremely high salience with the public and may be one of the reasons why IHT is regularly cited as the UK’s most unpopular tax. And yet, most estates do not actually pay 40% tax, or anywhere close to this. The explanation lies in the proliferation of allowances, exemptions and reliefs for IHT (referred to as ‘reliefs’ for short), which mean that the  statutory tax rate is not a good guide to the effective tax rates that estates actually pay.

In this report, CenTax use de-identified tax data covering all estates filing for IHT between 2018-2020 to shed new light on IHT reliefs and their role in driving differences in effective tax rates across estates. They also evaluate whether these apparent inequities can be justified in light of other policy objectives. Finally, they discuss options for reforming IHT reliefs and provide evidence on the revenues that could be raised.

Key findings

• On average, Business Relief almost halves the effective tax rate paid by estates worth over £30 million (from 23% to 12%), compared with only a one percentage point reduction for estates valued at less than £1.5 million. More than two thirds of Business Relief goes to around 400 estates per year claiming more than £1 million each in relief.

• Only a quarter of those claiming Business Relief on shares had been involved in management of a business as a company director at any point in the five tax years prior to death. This suggests that most claims for Business Relief are by ‘passive’ investors rather than ‘active’ business owners. This figure includes investments in AIM shares.

• Almost two thirds (64%) of Agricultural Relief went to around 200 estates per year that each claimed more than £1 million in relief, with an average estate value of £6 million.

• Agricultural Relief can be claimed by landlords as well as active farmers, provided that they have owned the land for at least seven years. Less than half (44%) of individuals who claimed Agricultural Relief had received any trading income from agriculture at any point in the five tax years prior to death. Income from agriculture made up less than a quarter of their income.