The UK government is urged to scrap the inheritance tax system due to concerns that it places heavy financial burdens on families and discourages saving and investment. A new report from the Institute of Economic Affairs (IEA) highlights that nearly half of OECD countries do not tax transfers left to children. Britain has the fifth‑highest inheritance tax in the OECD, placing it among a small group of high‑tax outliers.
How does inheritance tax work in the UK?
Inheritance Tax (IHT) can be charged on the estate of someone who has died, including their property, money, and personal belongings. No tax is due if the estate is valued below the £325,000 threshold. Any amount above this limit is taxed at 40%. If the estate is left to children or grandchildren, the threshold can rise to £500,000.
Britain’s 40% headline rate sits moderately above the OECD median, which does not reflect on the UK true position. In the UK, frozen thresholds and rising property prices are pulling more families into the inheritance tax net. As well as further increases expected as pension pots come into scope from April 2027.
International competitiveness
Nearly half of OECD countries, 18 out of 36, do not tax parental transfers to children. The report highlights that inheritance tax generates relatively little revenue, is costly to administer, and influences the decisions of entrepreneurs establishing businesses. As a result, these factors place the UK at a competitive disadvantage.
Proposed reforms
The IEA has suggested abolishing inheritance tax to boost economic growth, support families, and create a tax system that promotes fairness and competitiveness. Researchers made alternative recommendations, which included:
- Raising the nil‑rate band significantly to prevent the majority of estates from being pulled into the inheritance tax net.
- Cutting the headline rate from 40% to 20% to reduce the cost of paying tax on estates above the threshold.
- Simplifying the gifting rules by shortening the period after which lifetime gifts become exempt from seven years to three or two years.
- Or, abolishing the inheritance tax system completely.
There is a strong argument for abolishing inheritance tax, driven by rising public support and concerns about its unfair nature. By abolishing inheritance tax could affect British’s competitiveness of residency by attracting entrepreneurs and wealthy individuals.
Conclusion
While the inheritance tax system was designed to ensure wealth redistribution, its frozen thresholds and rising property values are pulling more families into the tax net. The IEA report suggests that the UK stands as a high‑tax outlier compared with many OECD countries.
Reforming or abolishing the current system could ease financial pressures on families, support entrepreneurship, and enhance Britain’s international competitiveness. Overall, the report calls for change that would better position the UK better and aims to attract more people. For more blogs like this, click here.
