Britain is among the toughest countries in the developed world when it comes to taxing money and assets passed from parents to their children, new research suggests.
At first glance, Britain’s inheritance tax rate of 40 per cent appears only slightly above the average among OECD countries.
However, analysis by the Institute of Economic Affairs has found that said this headline figure hides a much tougher reality.
The issue is likely to become increasingly significant for British families as policy changes bring more estates into the scope of the tax.
Stephen Lowe, director at retirement specialist Just Group, warned that reforms announced in the 2024 Autumn Budget will accelerate the number of estates facing inheritance tax.
He said: "It is estimated that around one in 10 deaths (9.5 per cent) will be subject to inheritance tax by the end of the decade (2029/30) as these fiscal reforms kick in and pull ever more people into the thresholds."
He added that the removal of the pensions exemption from inheritance tax will be the largest contributor to the increase. The Office for Budget Responsibility estimates that from April 2027 this change will bring 31,200 additional estates into the scope of inheritance tax before the end of 2029/30.
Unlike many other developed economies, the UK applies the same tax rate regardless of the relationship between the person who died and the person inheriting the assets.
Across the OECD's 38 member countries, 18 do not charge any inheritance tax at all when wealth is passed to children.
A further 10 countries apply lower, preferential rates for transfers to direct descendants.
This detail means the levy has a "far more punishing" impact on hardworking families than it first appears, and risks stymying the country's economic growth, the IEA argued.
As a result, only four countries in the developed world impose higher taxes on inheritances passed to children than Britain: the United States, Japan, South Korea and France.
Lord Frost, the former Conservative Brexit minister who now serves as the IEA's director general, condemned the levy as fundamentally unjust.
"A nation serious about growth and about giving families the freedom to build something lasting, would not levy a 40 per cent charge on wealth that has already been taxed," he said.
Some gifts and property are exempt from Inheritance Tax, such as some wedding gifts and charitable donations | GETTYThe peer argued that inheritance tax generates modest revenue whilst imposing substantial administrative burdens, with the Government spending £66million annually simply to collect it.
He contended the system warps decision-making among precisely the wealth creators and business founders that Britain needs to attract and retain.
"Nearly half of OECD countries do not tax what parents leave their children at all," Lord Frost added, calling on ministers to abolish the levy entirely to enhance economic competitiveness.
Rory Meakin, the report's author, described the current system as needlessly convoluted and economically damaging.
The standard Inheritance Tax rate is 40% | GETTY"Inheritance tax is arbitrary, complex, distortionary and drives away the entrepreneurs Britain needs," he said.
"A good tax system would not have an inheritance tax and, ultimately, ours should be abolished."
For a Government reluctant to pursue outright abolition, the IEA outlined several intermediate measures.
These include lifting the nil-rate band substantially to £2million or higher, which would exempt the vast majority of estates from liability. Alternatively, halving the headline rate from 40 per cent to 20 per cent would ease the burden across all taxable estates.
The think tank also proposed streamlining rules around lifetime gifts, potentially reducing the exemption period from seven years to just two
| GETTYThe think tank also proposed streamlining rules around lifetime gifts, potentially reducing the exemption period from seven years to just two.
The Treasury defended the existing framework, noting that fewer than one in ten estates are projected to incur the charge over the coming five years.
"Individuals will still be able to pass on up to £500,000 tax-free each and up to £1million in some situations," a spokesman said, adding that recent budgetary decisions would enable the government to address priorities including NHS waiting lists and reducing borrowing.
The report emerges against the backdrop of prolonged tensions over agricultural inheritance rules. Ministers provoked widespread protests from farmers after the 2024 Autumn Budget proposed removing tax breaks for family farms.
Following more than a year of demonstrations, the government relented in December, raising the tax-free threshold for agricultural assets from £1million to £2.5million.
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