In the United Kingdom, inheritance tax is a transfer tax. It was introduced with effect from 18 March 1986, replacing capital transfer tax. The UK has the fourth highest inheritance tax rate in the world, according to conservative think tank, the Tax Foundation, though only a very small proportion of the population pays it. 3.7% of deaths recorded in the UK in the 2020-21 tax year resulted in inheritance tax liabilities. Other countries such as China, Russia and India have no inheritance tax, whilst Australia, New Zealand, Canada, Norway and Israel have all chosen to abolish succession taxes.
History
Prior to the introduction of estate duty by the Finance Act 1894, there was a complex system of different taxes relating to the inheritance of property, that applied to either realty (land) or personalty (other personal property):
From 1694, probate duty, introduced as a stamp duty on wills entered in probate in 1694, applying to personalty. From 1780, legacy duty, an inheritance duty paid by the receiver of personalty, graduated according to consanguinity From 1853, succession duty, a duty introduced by the Succession Duty Act 1853 applying to realty settlements, taking effect on the death of the settlor From 1881, account duty applied as an anti-avoidance duty on lifetime gifts made to avoid paying Legacy Duty From 1885, corporation duty applied to the annual value of certain property vested in corporate and unincorporated bodies that would otherwise have avoided any of the above duties From 1889 (scheduled for expiry in 1896), estate duty, being an additional stamp duty on estates and successions greater than £10,000 in value
In 1894, estate duty replaced probate duty, account duty, certain additional succession duties, and temporary estate duty.
Legacy duty and succession duty were later abolished by the Finance Act 1949, followed by the abolition of corporation duty by the Finance Act 1959. The three-year period for gifts made prior to death was extended to five years by the Finance Act 1946, and then to seven years by the Finance Act 1969.
Estate duty became more progressive in scale, eventually peaking in 1969 with the highest marginal rate fixed at 85% of amounts in excess of £750,000, provided that total duty did not exceed 80% of the value of the total estate.
Estate duty was abolished with the passage of the Finance Act 1975, which created the capital transfer tax, with the following characteristics:
It captured all transfers of value, not made at an arm's length basis, by which the transferor's estate was less in value after the disposition than it was before. Value was generally defined as "the price which the property might reasonably be expected to fetch in the open market at that time; but that price shall not be assumed to be reduced on the ground that the whole property is to be placed on the market at one and the same time." Transfers (in excess of specified limits, or not otherwise excluded) made during a person's lifetime were accumulated with tax assessed on a sliding scale on the total amount. All transfers made at death or within three years before were taxable at a separate, higher sliding scale. Where the transferor was domiciled in the United Kingdom, tax was chargeable on all subject property; otherwise, it was chargeable only on property situated in the UK.
CTT was reduced in scope during the Thatcher years, with most lifetime gifts removed by the Finance Act 1986. The tax was renamed as inheritance tax.
Framework of IHT
Estate on death
For IHT purposes, a person's estate includes:
The aggregate of all the property, other than excluded property and specified interests in possession, to which he is beneficially entitled; Beneficial entitlement includes the general power to dispose or charge money on any property; Except where otherwise provided, the person's liabilities must be taken into account, but it does not include liability with respect to any other tax that may arise on the transfer, and a liability incurred by a transferor shall be taken into account only to the extent that it was incurred for a consideration in money or money's worth.
Excluded property comprises:
Property situated outside the United Kingdom, where the person beneficially entitled to it is an individual domiciled outside the United Kingdom; Decorations and awards granted for valour or gallant conduct, and which have never been the subject of a disposition for a consideration in money or money's worth; and Certain specified securities.