Economists have called for the abolition of Britain’s inheritance tax, labeling it one of the most severe in the Western world, according to a significant report released today. The system, which imposes a 40% tax on assets exceeding £325,000, has been criticized as being more burdensome than it appears at first glance.
A think tank, the Institute of Economic Affairs (IEA), argues that this tax should be eliminated due to its substantial financial burden on families and its discouragement of saving and investment activities.
Ranked as the fifth-highest among countries in the Organisation for Economic Co-operation and Development (OECD), this tax is said to weaken the UK’s competitive edge on a global scale.
IEA analysts highlighted that nearly half of the 38 OECD member countries do not impose any tax on inheritances, while another ten offer more favorable rates. This analysis was based on the actual amount parents can leave to their children.
Tax expert Rory Meakin, in his report, noted that while the UK’s 40% rate appears slightly above the OECD median, this figure does not fully capture the UK’s true standing.
The report by tax expert Rory Meakin concluded: ‘While Britain’s 40 per cent headline rate sits only moderately above the OECD median, this flatters the UK’s true position.
‘Most countries treat transfers from parents to their own children as a special category, taxing them at lower rates or not at all. Britain makes no such distinction.’
The London-based experts also said the tax ‘is among the most disproportionately complex in the British system, when compared with the revenue it brings in’.
Chancellor Rachel Reeves speaks during a meeting at 11 Downing Street last Friday
Organisation for Economic Co-operation and Development members by top headline rate of inheritance taxes (percentage)
OECD members by top rate of inheritance taxes on bequests to adult children (percentage)
Headline rates of estate duty, capital transfer tax and inheritance tax on selected estate values at 2025 prices and the highest rate, in this graph from the Institute of Economic Affairs (IEA)
Thresholds at 2025 prices for estate duty, capital transfer tax and inheritance tax at selected rates and the highest rate
Inheritance tax nil rate bands from 1988 to 2025, in 2025 prices in pounds
Proportion of deaths resulting in an inheritance tax charge (percentage)
Share of taxed estates granted exemption for transfers between spouses or civil partners, by value and by number (percentage)
Proportion of deaths resulting in an inheritance tax charge, reporting to HMRC but not resulting in a charge, and not reporting to HMRC (percentage)
Effective tax rates on estates by lower band in 2022–23 (percentage)
They cited the Tolley’s Handbook for inheritance tax, pointing out this runs to 1,000 pages, compared to the 2,500 pages for income tax that raises 37 times the revenue.
Former Conservative minister Lord Frost, the IEA’s director general, said: ‘A nation serious about growth and about giving families the freedom to build something lasting, would not levy a 40 per cent charge on wealth that has already been taxed.
‘Nearly half of OECD countries do not tax what parents leave their children at all. Inheritance tax raises relatively little, costs a great deal to administer, and distorts the decisions of exactly the kind of wealth creators and entrepreneurs we are desperate to attract and retain.
‘A government looking to boost growth, support families and simplify the tax system for fairness and economic competitiveness should consider abolishing inheritance tax.’
While the researchers called for full abolition of the tax, they also set out less expensive reforms if the Labour Government is unwilling to go so far.
These included raising the nil rate band significantly to £2million or beyond, which would ‘remove the overwhelming majority of estates from liability altogether’.
Another option of cutting the headline rate from 40 per cent to 20 per cent was suggested because it ‘would reduce the burden on all estates paying the tax’.
A further idea was simplifying the gifting rules – such as reducing the period after which lifetime gifts become exempt from seven years to as little as two years.
Mr Meakin said: ‘Inheritance tax is arbitrary, complex, distortionary and drives away the entrepreneurs Britain needs. A good tax system would not have an inheritance tax and, ultimately, ours should be abolished.
‘But even a hesitant government can reform the system now. Raising the threshold, cutting the rate, simplifying the gifting rules: any of these would be a meaningful step in the right direction.’
A Treasury spokesman said: ‘Fewer than 10 per cent of estates are forecast to pay inheritance tax over the next five years. Individuals will still be able to pass on up to £500,000 tax-free each and up to £1million in some situations.
‘The fair and necessary decisions we made at this Budget and the last mean we can deliver on the country’s priorities – cutting waiting lists, cutting debt and borrowing and cutting the cost of living.’
Last December, the Government said it would raise inheritance tax relief threshold for farmers from £1million to £2.5million in a climbdown following months of protest.
The original Treasury plans from Labour’s first Budget in 2024 to raise money as farmers pass their businesses from generation to generation triggered protests with tractors outside Parliament and criticism from some Labour MPs in rural seats.
