Inheritance tax named the UK's most hated levy - here's why (2024)

Inheritance tax has been named Britain's most hated tax, despite it being paid by only 4 per cent of the population's estates.

As many as one in four people consider it their least favourite tax, according to a survey by Hargreaves Lansdown, making it more unpopular than income tax, national insurance, and VAT.

Tax on income, which includes income tax and National Insurance, is the second most hated with 17 per cent of Britons picking this as their most despised levy.

Sarah Coles, personal finance analyst at Hargreaves Lansdown said: 'Nobody actively enjoys paying tax, but while we're prepared to accept some as a fact of life, others inspire deep and abiding hatred among millions of us.

'Our hatred of inheritance tax belies the fact that in reality only 4 per cent of people pay it, and that of the £334.3billion taken in tax between April and September this year, just £3.1billion of it was inheritance tax.'

She adds: 'Rather than being a specific irritation with how it affects us, in many cases it's more of an ideological resentment.

'People don't like to think of money they've already paid tax on being taxed again, and they want their loved ones to benefit from their legacy rather than the taxman.'

But while it is only paid by a small amount of estates, the amount taken in by the taxman has nearly doubled in a decade, from £2.9billion in 2011/12 to £5.2billion in 2020/21.

Recent decades have seen more families caught in the inheritance tax net, as rising property prices push a generation's homes into being affected.

The addition of the extra own residence nil rate band, of £175,000 each, which took the total total amount that can be passed on tax-free to direct descendants by a married couple or civil partners up to £1million, has stalled this but numbers are expected to climb again.

Some analysts suggest that in future as many as one in ten estates could end up paying 40 per cent tax on some wealth passed on.

The survey also found that tax on investments such as capital gains tax was joint third on the most despised tax list - 15 per cent of people voted for this as their most hated form of taxation.

Men are more likely to resent tax on spending - 18 per cent compared to 13 per cent of women, whilst women are more likely to hate inheritance tax - 27 per cent compared to 22 per cent of men.

With the budget taking place on Wednesday there are fears about tax rises as the Government looks to recoup the coffers spent battling Covid.

The Government borrowed £320billion in the year ending April 2021, which is the highest figure recorded outside of wartime and economists expect the government will borrow a further £180billion by the end of this tax year.

As the Chancellor weighs up potential tax changes in the budget, we take a closer look at inheritance tax, as well as tax on income and investments, and consider the likelihood of any rising on Wednesday.

Inheritance tax

What is it?

Inheritance Tax is a tax on the estate of someone who has passed away.

Inheritance tax is charged at 40 per cent above the tax-free allowances everyone has on their estate, known as nil rate bands.

This is made up of the standard nil rate band of £325,000 per individual - of which any unused element can be passed on to a spouse or civil partner, effectively doubling their allowance to £650,000.

Under current rules, if you give away a main family home to direct descendants, a total of £500,000 each, or £1million combined, is the maximum value that a married couple or civil partners' estate can reach before it starts being liable for the 40 per cent inheritance tax rate.

In total, this means property-owning spouses can benefit from a £1million buffer before their estate incurs inheritance tax.

But if the total value of an estate is worth £2million or more, the additional main residence nil rate band will be tapered at £1 for every £2 over the £2million threshold, meaning some higher value estates eventually lose the own home benefit altogether.

The other key inheritance tax basic to remember is the seven-year rule.

This applies to gifts that are above set limits - for example, making more than £3,000 in gifts per year - and are known as potentially exempt transfers.

Such a gift will only be free of inheritance tax if you survive more than seven years after making it.

If someone dies between years three and seven of making a gift, inheritance tax on it tapers down on a sliding scale.

Outside the gifting allowances, you can make gifts of any size (known as potentially exempt transfers) and as long as you live for at least seven years after handing it over, it falls outside of your estate for inheritance tax purposes.

If you die before the seven years are up, and your estate is subject to inheritance tax rules, you will have to pay tax on some of this.

Will it rise?

It's very unlikely. Earlier this year, the chancellor, Rishi Sunak said the inheritance tax nil-rate bands would be frozen until 2026.

By then, the £325,000 exemption would have remained frozen for 17 years.

But regardless, more and more people are likely to become liable for paying it due to asset prices continuing to rise.

HMRC revealed it collected £5.33billion from inheritance tax in the 2020-21 financial year, up from £5.12billion the year before.

With average house prices having risen by £25,000 over the past year according to ONS figures, more people are finding themselves dragged over the threshold at which inheritance tax becomes due - largely due to the value of their property.

Rather than tinkering with the headline rate, experts believe the Chancellor is more likely to target various areas that are currently exempt from inheritance tax such as some agricultural land.

Graham Boar, partner at chartered accountants UHY Hacker Young says; 'It's unlikely there will be an increase in the headline rate of inheritance tax, which is already high at 40 per cent.

'If the Government wants to do a raid on Inheritance Tax, it's far more likely to come from removing or trimming back Business Property Relief or Agricultural Relief.

'These reliefs shelter certain assets from Inheritance Tax and can mean big chunks of wealth are passed down without incurring any charges.

'There's been criticism that these reliefs are being applied too generously at the moment, which makes them an easier target for the Government to go for than increasing the headline rate of IHT.'

Tax on income

What is it?

Tax on income includes income tax and National Insurance.

Taxes on different forms of personal income provide the biggest source of revenue for Government with income tax raising £193.6billion in the 2019/20 tax year.

Income tax is the tax you pay on regular earnings, such as working as an employee or any profits you make if you're self-employed.

It can include rental income if you're a landlord, interest earned on savings and it is also charged on some state benefits such as job seekers allowance and most pensions including the state pension.

You begin paying income tax if you earn above £12,570 in a given tax year - up until this point everyone has a personal tax free allowance.

However, your personal allowance goes down by £1 for every £2 that your income is above £100,000 meaning your allowance becomes zero if your income is £125,140 or above.

Your income between £12,571 and £50,270 is taxed at the basic rate of 20 per cent whilst income between £50,270 and £150,000 is taxed at the higher rate of 40 per cent.

Those earning £150,000 or more are taxed at the additional rate of 45 per cent on all income received above that level.

On top of income tax, we also pay national insurance contributions to qualify for certain benefits and the state pension.

You will pay this if you're an employee earning above £184 a week or self-employed making a profit of £6,515 or more a year.

National insurance is currently charged at a rate of 12 per cent on earnings between £184 and £967 each week and at 2 per cent on earnings over that - although this is set to rise from April next year.

Will it rise?

National insurance is already set to increase from next Spring, rising by 1.25 per cent from 12 per cent to 13.25 per cent.

This came despite the Conservative party pledging not to raise taxes in its 2019 manifesto.

The increase will mean a worker who earns £30,000 a year will have to pay an extra £255 in tax while a worker who earns £50,000 will pay an additional £505.

High earners with a salary of £100,000 will have to pay an extra £1,130.

Few commentators are expecting the Government to increase income tax or announce a further rise to national insurance.

Richard Brooks private tax advisor at MHA Monahans says: 'No one can truly predict what is going to happen on 27 October however, but it is unlikely that the government will increase income tax or national insurance for the 2022 tax year due to its commitment to the UK being a low tax jurisdiction.

Boar adds: 'The Chancellor has a huge hole to fill in the country's finances and it would be tempting for him to raise income tax, even by 1 per cent, as this would raise a huge amount of money.

'But it's highly unlikely the Chancellor will go down this route as it would be enormously unpopular - an increase in income tax would affect almost everyone, not just the wealthy.

'The Chancellor has already caused a lot of ripples by his raid on National Insurance Contributions.'

Tax on investments

What is it?

Tax on investments typically relates to capital gains tax and in the case of stocks and shares will also often involve dividends.

Capital gains tax can be charged on any profit you make on an asset that has increased in value, when you come to sell or when gifting it or transferring to someone else.

You are only required to pay capital gains tax if the gain you make exceeds your £12,300 tax free allowance in a single year.

For investments such as stocks and shares, basic rate taxpayers pay 10 per cent when exceeding their personal allowance whilst higher rate and additional rate taxpayers pay 20 per cent.

It's also worth noting that crypto assets such as bitcoin are also charged capital gains tax at this rate.

On residential property, capital gains tax is currently charged at 18 per cent for basic rate taxpayers and 28 per cent for higher rate taxpayers - although when selling your main home you are entirely shielded from this by what is known as principal private residence relief.

If you make more than £2,000 in dividends outside an Isa, or realise more than £12,300 in capital gains in a single year, you will need to pay tax.

The most effective way to minimise any potential capital gains tax or dividends tax bill is to make full use your Isa allowance each tax year.

Shaun Moore, tax and financial planning expert at Quilter says: 'Isas should be an investors or savers best friend when it comes to tax efficiency.

'It should be used as much as possible up to the annual £20,000 allowance to shield savings and investments from capital gains tax, income tax or dividends tax.'

Will it rise?

Like with national insurance, from April next year, the dividend tax rate will rise by 1.25 per cent meaning basic rate taxpayers will begin paying 8.75 per cent whilst higher rate taxpayers will pay 33.75 per cent.

The government may therefore refrain from tinkering with that prior to the increase taking effect.

However, there was speculation that capital gains tax would rise before the last budget, which has led some to speculate that it could be targeted this time.

Last year, the Institute for Public Policy Research think-tank estimated that a capital gains tax rise could raise an extra £90billion over five years, which would certainly help with the UK's spiralling debts.

A later report by the Office of Tax Simplification published in November 2020, recommended that capital gains tax rates be increased to bring them in line with income tax.

Tram Abramov chief executive of TaxScouts, an online tax return service says: 'In terms of a prediction for this coming Budget, there has been talk for some time about capital gains tax levels being brought more in line with income tax levels, which they'd likely justify as a way to generate revenue as well as simplify the tax system.'

Interestingly some further analysis suggests that the actual percentage of capitals gains tax people are paying is reducing.

In the 2019/20 tax year, just £9.3billion of capital gains tax was paid on gains worth £62.7billion, according to research by accountancy group, UHY Hacker Young.

This means of the capital gains made in the past tax year, an effective rate of only 14.9 per cent tax was ultimately paid, down from 16.5 per cent a decade ago.

The decrease in the effective rate of tax paid is likely due to people becoming more aware of the types of reliefs available and making greater use of these.

Boar says: 'The decreasing effective rate of capital gains tax paid suggests many investors are making as much use of the tax reliefs as they can.

'Whilst they are well within their rights to do that, it is impacting HM Treasury's desire to maximise tax revenues.

'Clamping down further on some of the capital gains tax reliefs seems a logical next step, as well as looking at the headline rate.'