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Old man appearing to say I don't mind paying tax while I'm alive. However, I really hate paying 40% when die

Inheritance Tax The UK’s most hated tax

It’s a given, that no-one enjoys paying tax, but most of us recognise that to provide the cash for the NHS, pensions, social care et al, we all must pay a bit. This however is where the arguments start as to what should be taxed and by what amount.

A trawl of media coverage over the last year or so, strongly indicates that Inheritance Tax (IHT) is Britain’s most hated tax. But why is IHT at the top of the list and what are the reasons for why it gets such a bad press when only a small minority of people actually pay it?

Inheritance Tax: The view from Number 10

Right from the start, when he was appointed Chancellor, Rishi Sunak has followed the same pattern of testing the water on potential changes to the tax system, by leaking details to friendly media outlets and waiting for the public’s reaction.

If one of his apparently clever schemes is criticised, his default position has always gone along the lines of total deniability, saying: “that was never under serious consideration by the government”. Or something similar.

Apparently forgetting that he’s no longer Chancellor, the most recent “rumour” emanating from Number 10 suggests that Mr Sunak is considering reducing the 40% rate of IHT by cutting by up to half, with a strong hint that this is the first step towards full abolition.

The story was reported by most journalists as being what the public wanted, with one Daily Mail headline screaming, Britain’s most hated tax to go! This of course beggars the question as to the basis of ‘the most hated tax’, is it based on information from Rishi’s team at Number 10 or detailed surveys carried out by hard-working journalists.

Inheritance Tax: An odd conclusion

The press reports left me wondering how anyone could possibly come to such an odd conclusion, when the Institute for Fiscal Studies (IFS) in their last report estimated that the hated tax only applies to under 5% of UK estates, with sophisticated avoidance measures by the wealthy, reducing the liability significantly.

Furthermore, the IFS has recently published an analysis of the effects of potentially scrapping IHT and this shows a cost to the Exchequer of £15bn per year. Given that it is not unreasonable to assume that most of the 5% are not significantly above the £325,000 threshold, the percentage materially harmed, according to the IFS is only a tiny 1% of all estates.

In truth, the only way to accurately discover whether those directly affected are up in arms would be to carry out a series of séances, given that the tax falls on those that have regrettably shifted off this mortal coil. The only conclusion you can come to is that it’s the beneficiaries of bequests that suffer, and most of this group are just grateful to receive a windfall, regardless of the tax paid.

So why is Inheritance Tax so widely hated?

The only reasonable assumption as to why the furore exists, is that a combination of the government and the media, including social media, are collectively responsible for spreading disinformation and promoting this false assumption for their own self-serving interests.

In the circumstances, you might have thought that the Government, especially HM Revenue & Customs, would go out of their way to correct the misunderstanding. If IHT does not deserve to be classed as the UK’s most hated tax, then the next question is which of its cousins should take that much-desired crown?

Inheritance Tax: Are there are other candidates?

The quick answer is that there are several other taxes jockeying for the top role. Just take either Income Tax or National Insurance Contributions, as each of them affects a significantly greater percentage of the population and picks the pockets of most victims on a monthly basis, whereas IHT is a once-in-a-lifetime (if that) experience.

There are of course many other candidates, so if you happen to be a smoker or drinker, then duties are swingeing and might well be the subject of far more criticism in the pub than poor old IHT. Given the energy crisis of recent times, Petroleum Revenue Tax could also be in the frame, whilst Council Tax is a particularly heavy burden, especially on those towards the bottom of the income pile.

And the winner is……..

In the opinion of most accountants and anecdotally their clients, there is only really one candidate for the title of Britain’s most hated tax: that is VAT. IHT is only paid on up to 5% of estates above the £325,000 threshold and there is also a threshold for both income tax and NIC, meaning that the poorest in society pay little or none, however VAT is omnipresent and almost impossible to avoid.

It is hard to believe that there is any person living in the UK who does not consume goods or services that have been subject to a 20% VAT charge, though some babies might just get away with 5%. In addition, even foreign tourists find themselves stumping up VAT as they pick up bargains in Harrods, visit theatres or pay their hotel bills.

Perhaps it is time for somebody to carry out a detailed survey or possibly even a poll to determine the true answer to this question. Before that, perhaps an education programme to support a tax that will bring in £15bn a year by 2032 without affecting over 95% of the population should be tried by Mr Sunak as part of his pre-election agenda.

Tax Accountant’s view

My own personal opinion is that IHT’s position as the UK’s most hated tax, whilst only being given this crown by self-appointed adjudicators in the press and government, is because it is fundamentally unfair.

You earn money and it is taxed, you save the money and it is taxed, any interest or the value of any asset bought is taxed; so why can’t you give what’s left to your loved ones without it being taxed for a third time and at a whopping 40%?