In 1780 it became a graduated rate to finance the American Revolutionary War, becoming more like the progressive tax we know today during the First World War. By that time, its name tag had changed to estate duty, and this continued until the Labour government replaced it with Capital Transfer Tax in 1975. This only lasted 11 years when in 1986 Nigel Lawson, the Labour Chancellor, remodelled it and called it by its present name - Inheritance Tax (IHT). Thus IHT celebrates its 37th birthday this year, which says a lot about Mr Lawson.
Originally the death tax was designated to dilute the substantial inherited wealth of the British upper class. About 100 years ago the highest marginal rate was 40% and the tax was levied on estates valued above £2 million (about £90 million in today's money). Under IHT an estate valued in excess of a modest £325,000 has to bear a flat 40% charge.
Successive prime ministers and chancellors have promised changes but reform has never happened. Even the all-party Parliamentary group which recommended a range of reforms in 2020 failed to gain the attention of men and women who could change things. Jeremy Hunt has frozen the nil rate band of £325,000 until 2027/28, despite the fact that this limit has been in place since 2009/10. Unless he changes his mind we are stuck with the same amount for another five years.
So what has happened? A tax originally targeted at this country's super rich has evolved into a key stealth tax on middle-class Britons and the Treasury is currently expected to collect nearly £7 billion a year. This is a lot of money and understandably chancellors are increasingly reticent to take any action which would disturb this inflow.
Of course the underlying problem is the inflationary growth in the value of land and property which is set to rise inexorably, particularly in London and the South East. It is all very well for Nigel Lawson to have said, "Inheritance Tax is voluntary tax - you can either do nothing and volunteer to pay it, or you can take steps to avoid it." It is not easy to reduce an estate where the major asset is the family home.
Conservative governments have brought in a few measures to ease the situation. The transferable nil rate band and the residence nil rate band (also transferable) do provide a measure of relief. However, these changes do not affect everyone (single people with no family gain no benefit at all) and frankly have left the IHT legislation in an awful mess.
So who will have the courage to grasp the nettle and propose radical reforms? What are the options given that taxes should be fair and transparent? What do other tax jurisdictions do? Draw a deep breath and suggest:
- The total abolition of inheritance tax and estate taxes. Many countries including Canada, Australia, New Zealand, Israel, and Norway (to name but a few) have abolished inheritance taxes or have never imposed them.
- A significant increase to the current nil rate band - say £1 million.
- An amendment to the annual gifts exemption of £3,000 per annum increasing this to a much higher figure.
- An amendment to the seven-year rule, currently limiting the effectiveness of lifetime gifts.
It is tempting to include "do nothing" as an option. In fact this is not an option. Most people who have anything to do with these matters agree that reform is long overdue. Perhaps Jeremy Hunt will surprise us on the 15th March.