Inheritance tax in Britain has earned the government a huge £1.5 billion (about £15,000 Billion ) in the first two months of this financial year. According to the latest data released by HM Revenue and Customs (HMRC), this figure is £98 million more than the same period last year.
This increase is being seen at a time when there is a lot of talk about the possibility of the new Chancellor Rachel Reeves taking a U-turn on the decision to bring the global assets of ‘non-dom’ citizens under the purview of inheritance tax. This entire incident has sparked a debate about the tax system and economic policy in the country.
What is inheritance tax?
Inheritance tax (IHT) is a type of tax that is levied on a person’s property (such as land, house, bank balance etc.) after his death. If someone’s property exceeds a certain limit, then inheritance tax has to be paid on it. In the UK, this tax is applicable when the total value of the property exceeds £325,000. After this, the additional property is taxed at the rate of 40%.
Why is the inheritance tax income increasing rapidly?
The government income from inheritance tax has been increasing continuously for the last two decades. There are many reasons behind this increase:
- Increase in property prices:
The prices of houses and land in the UK are constantly increasing. Due to this, more people are coming under the purview of IHT, especially in areas like London and Southern England.
- Freezing the tax exemption threshold:
The government has frozen the tax exemption limit for many years. That is, if the property limit does not increase, but property prices increase, then more people’s property goes above the limit.
- Policy confusion and proposed changes:
There is constant speculation about changes in financial policy. Due to this, people are not able to transfer their property ahead of time, due to which the entire property comes under the purview of tax at the time of death.
New tax proposal on ‘non-doms’ – the root of the controversy
Some people in Britain have ‘non-domiciled’ status, which means that their major assets and tax residency are considered to be outside the UK. Such people generally did not pay tax on foreign income despite being in Britain.
Former Finance Minister Jeremy Hunt had announced that the global assets of these non-doms would also be brought under the purview of inheritance tax. But now there are reports that the new Chancellor Rachel Reeves may reconsider this proposal and take a U-turn. This may provide relief to the high income group, but it will affect the tax income of the government.
Wealth Club investment manager Nicholas Hyett says,
“If recent rumors are to be believed, the Chancellor may now back down from the decision to tax the global assets of non-doms. This will save the rich class but the burden will remain on the common taxpayer.”
Does inheritance tax really affect the general public?
Although this tax applies mostly to the wealth of wealthy families, with property prices rising and exemption limits remaining constant, middle class families are now also affected. For example:
If a person owns a house in London worth £500,000, inheritance tax may apply.
If they also have some bank balance, investments or other assets, the total value very easily goes above the exemption limit.
Increased need for financial planning
To avoid inheritance tax, people are now planning to transfer assets during their lifetime. Some common measures are:
- Gifting: Gifting part of your assets to children or a trust.
- Setting up a trust: Avoiding inheritance tax on assets by placing them in a trust.
- Life insurance policy: Creating an insurance plan to pay for IHT.
- However, all these measures require the right advice and planning, so it is extremely important to get professional financial advice.
Political and social debate:
Inheritance tax has always been a sensitive issue in the UK. On the one hand, some dismiss it as a ‘death tax’, while on the other hand some see it as a means to bring economic equality. The public is also divided over Rachel Reeves’ potential U-turn:
Its supporters claim: It would lead to the better investment climate and prevent the foreign capital outflow of UK.
Critics add: It is another means of providing additional tax exemptions to the wealthy, higher taxes on the middle class and the poor.
What could be the future direction?
If there are changes to the rules of inheritance tax, the financial planning of many families will be affected. Experts estimate that if there are no major policy changes, IHT could cost the government more than £8.5 billion by the end of 2024-25 – an all-time record.
Conclusion:
Inheritance tax is no longer just an issue for the rich. As property prices are rising and tax policy is becoming unclear, middle class families are also getting affected. Transparency in policy and timely decision making is not only important for the financial planning of common citizens, but it is also very important for the credibility of the government and economic balance.
FAQs
Q1. What is inheritance tax (IHT) in the UK?
A: Inheritance Tax is a tax on the estate (property, money, and possessions) of someone who has died. It typically applies if the value exceeds £325,000, with a standard rate of 40% on the amount above that threshold.
Q2. Why has the UK Treasury collected £1.5 billion in IHT in just two months?
A: The surge is due to rising property values, frozen IHT thresholds, and anticipation of rule changes that could bring more estates into the tax net.
Q3. What is the alleged U-turn by Chancellor Rachel Reeves?
A: It is speculated that Rachel Reeves might reverse a previous decision to subject non-domiciled individuals’ global assets to UK inheritance tax, though this is not officially confirmed.
Q4. Who are non-domiciled (non-dom) individuals?
A: Non-doms are people who live in the UK but claim their permanent home (“domicile”) is outside the UK, allowing them to avoid UK tax on overseas income and assets.
Q5. Why is taxing non-doms’ global assets controversial?
A: Supporters say it ensures tax fairness and increases revenue. Critics argue it might drive wealthy individuals and investors out of the UK.
