Inheritance tax is a hot topic in the UK, affecting more and more families over time.
But why do we pay this tax, and what is it really for?
(Read Time: Approx. 3 minutes)
Topics Discussed:
- The origins and evolution of inheritance tax in the UK.
- The purpose of inheritance tax and its role in public finance.
What is Inheritance Tax?
Inheritance tax, originally introduced in 1894 as Estate Duty, was first meant to tax only the wealthiest estates to help cover a government deficit.
Back then, estates over £100 were taxed at 1%, with the highest rate reaching 8% for estates over £1 million.
What’s the difference today?
Today, inheritance tax (IHT) has changed a lot.
Now, estates worth over £325,000 are taxed at 40%. For married couples, this threshold can go up to £1 million.
As a result, more estates are now subject to this tax. In 2017/18, the government collected £5.2 billion from IHT, and this is expected to increase to £6.3 billion by the end of this year.
The Evolution of Inheritance Tax
Initially designed as a means to address wealth inequality, inheritance tax today plays a deeper role within the broader taxation system.
At its core, IHT serves two primary functions: generating revenue for public services and acting as a lever to influence social behaviours, particularly in wealth distribution.
Inheritance tax receipts, though contributing less than 1% of the total annual tax take, are not earmarked for specific purposes.
Instead, they are pooled with other taxes like Income Tax, Corporation Tax, and VAT to fund government expenses.
These funds support essential services such as the NHS, education, and public infrastructure—services that benefit society as a whole.
Why Do We Have Inheritance Tax?
Originally, IHT was designed to reduce wealth inequality.
Now, it serves two main purposes: raising money for public services and helping to distribute wealth more fairly.
Although IHT makes up less than 1% of the total tax collected each year, it’s combined with other taxes like Income Tax and VAT to fund essential services such as the NHS, education, and public infrastructure.
Why Are We Taxed?
The government uses taxes like IHT to fund services that are essential but not profitable, such as healthcare, education, and national defence.
Additionally, IHT helps manage the UK’s national debt, which is significant and costly to maintain.
How Does It Promote Fairness?
Beyond just raising money, IHT also helps redistribute wealth.
By taxing estates, the government aims to prevent too much wealth from being concentrated in the hands of a few, promoting a fairer society.
However, as property values increase and tax-free allowances stay the same, more families are affected by IHT.
This has led many to look for ways to reduce their IHT liability to protect their wealth for future generations.
Summary
While inheritance tax can seem like a burden, it plays an important role in funding public services and promoting fairness in society.
However, with property values rising, more families are being impacted by this tax.
It’s crucial to plan your estate carefully to protect your family’s wealth.
If you’re concerned about inheritance tax, it’s a good idea to get professional advice.
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