Britain has fifth highest tax in the OECD on what parents leave to children, placing it in a small group of high-tax outliers and far above where headline comparisons often suggest
The tax is arbitrary, distortionary and expensive to administer, it imposes heavy costs on families, deters saving and investment, and undermines Britain’s international competitiveness
A new IEA paper calls for full abolition, but sets out a menu of less expensive reforms for a government unwilling to go that far
Britain’s inheritancetax (IHT) is far more punishing than headline comparisons suggest, and should be scrapped entirely, according to a new paper published today by the Institute of Economic Affairs.
The report, A Taxing Inheritance by Rory Meakin, finds that measured on what parents can actually leave their children, the UK has the fifth highest inheritance tax in the OECD. Almost half of OECD members, 18 out of 38, levy no tax on such transfers whatsoever, and a further 10 charge preferential rates.
While Britain’s 40% headline rate sits only moderately above the OECD median, this flatters the UK‘s true position. Most countries treat transfers from parents to their own children as a special category, taxing them at lower rates or not at all. Britain makes no such distinction.
Summary
Inheritance tax is levied on the estates of the deceased, including on lifetime gifts made up to seven years prior to death. Roman emperors levied taxes on inheritances, and the British history goes back to the Stamp Act 1694, later modernised by the Finance Act 1894 with the introduction of the estate duty. Rates were initially low with a top rate of 8% on estates worth over £1 million (£116 million in 2025 prices). But they rose precipitously over the 20th century to reach 85% before being renamed as capital transfer tax, applying to lifetime gifts, before reverting back to a tax on death estates only in the mid-1980s and being renamed again as today’s inheritance tax at a single headline rate of 40%.
Britain’s top headline rate of 40% is only moderately above the median rate among OECD countries which levy a tax, Czechia’s 35%. But 18 out of the 38 OECD countries, almost half, do not levy a tax on bequests to adult children of the deceased, and 10 charge preferential rates. Including these countries and those without a tax at all, Britain ranks fifth highest and is in a small group of high-tax outliers.
Much policy-expert commentary on the question of inheritance tax being a ‘double’ tax is mistaken, and the general public are closer to the truth. It may strictly speaking not be a ‘double’ tax given all the others that apply, but it is arbitrary, additional and distortionary. The correct lens to consider the question is the value chain from creation to consumption; inheritance tax somewhat arbitrarily introduces an additional point of taxation into the chain. The only way to make an inheritance tax neutral would be to implement a retrospective matching tax rebate for taxed income originally received by the benefactor.
Inheritance tax is particularly complex and costly to administer, but its effects on savings and investment and redistribution are more ambiguous, as is public opinion on the question of how to reform it. The public considers it to be unfair, and there is a large majority in favour of reducing it, and sometimes of abolishing it. But that opinion appears to weaken significantly when set against alternative taxes to cut instead.
There is a good case for abolishing inheritance tax entirely due to its arbitrary and distortionary nature, its complexity, its effect on savings and investment, its effect on Britain’s international competitiveness in attracting entrepreneurs and the very rich, and satisfying public opinion. But it is harder to make the case for abolition as a policy priority above other alternative tax cuts which might deliver greater effects on incentives when governments are unwilling to restrain spending enough to allow both.
More incremental reforms offer significantly weaker tax simplification, neutrality and efficiency benefits but come with smaller foregone revenues for the exchequer and represent a smaller opportunity cost in terms of alternative potential tax reforms.
Savings are deferred income. Thus the income tax should equally be deferred. That should then be paid when the savings are released for expenditure. So released capital would be liable to full income tax on the full amount and Capital gains tax would be superfluous.