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Government urged to hike IHT to tackle inequality

John Fitzsimons
Written By:
John Fitzsimons

Governments, including the UK’s, have been encouraged to consider increasing inheritance taxes in order to provide a boost to public finances by the Organisation for Economic Co-operation and Development (OECD).

New analysis released by the OECD revealed that while a majority of member nations have some form of inheritance tax in place, in most cases the revenue raised from the levy is minimal. In the UK for example, inheritance, estate and gift taxes represent just 0.71% of our tax receipts. Korea is the OECD nation that raises the largest proportion through these taxes, though even there it only accounts for 1.59% of its total tax revenues.

The OECD suggested that inheritance taxes can be used to reduce inequality, but warned that too often they include “generous tax exemptions” which benefit the wealthiest households and reduce the progressivity of such levies.

The UK was explicitly called out for this, with the OECD noting that just 3.9% of estates end up being subject to inheritance taxes, the second lowest after the United States (0.2%). This is substantially lower than the likes of Switzerland (12.7%) and Belgium (48%).

Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, said that while most OECD countries have these taxes in place, they play a limited role in raising revenue and addressing inequalities because of the way they are designed.

She added: “There are strong arguments for making greater use of inheritance taxes, but better design will be needed if these taxes are to achieve their objectives.”

How inheritance tax works in the UK

Currently, everybody enjoys an inheritance tax allowance. Essentially this means that if your estate is worth less than £325,000 when you die, then the taxman won’t take any of your estate.

You can pass your allowance onto your spouse when you die too, which means that couples effectively enjoy a £650,000 inheritance tax allowance. Your estate is then taxed at 40% for its value above this threshold.

There is an additional threshold to be aware of, thanks to the residence nil-rate band. This allows you to pass on your main home to your loved ones after you die, without it being subject to inheritance tax. This additional threshold currently stands at £175,000, meaning some individuals can pass on £500,000 free of tax, while couples can pass on £1m.

Alongside this tax relief, there are also rules covering gifts that you can make from your estate before you die which will not incur inheritance tax.

 There’s no escaping the fact that the current setup is somewhat complicated, which has led to some MPs calling for the system to be completely reformed

What’s more, falling property prices and share values have led to a spike in inheritance tax reclaims, which have reached a six-year high