120 Years of Inheritance Tax
17 December 2014 by Andrea Godfrey
Exactly 120 years ago the first form of Inheritance Tax (or Death Duties as they were then called) was introduced into the UK by Sir William Vernon Harcourt. They replaced legacy duties whereby taxes were paid on estates over a certain value by stamping Wills admitted to probate. By the middle of the 1800’s it was only estates worth over £20 that paid such taxes – to put it in perspective in 1857 the average gardener would earn £20 a year.
In 1894, William introduced the Death Duties. He was the second son and because the common law right was for the first-born son in a family to inherit an entire estate, rumour at the time was that he introduced this as a “second son’s revenge”. The Finance Act 1894 imposed a death duty extending to all property (real or personal) which passed on. Estate duty was imposed at graduated rates ranging from 1% to a maximum of 8%.
The Death Duties were replaced in 1975 by Capital Transfer Tax (CTT) under Harold Wilson and there were two taxes: the value of a person’s wealth at their death, and the second was taxation of gifts made by that person during their life. After hefty opposition, the Government agreed that there would be an exemption and tax would not be charged on gifts made between a husband and wife and property left by one to the other would also be exempt.
CTT was renamed Inheritance Tax in 1986 and there were not too many changes.
Interestingly, in 2002 The Queen Mother left her entire estate (estimated at £50 million) to her daughter The Queen. The inheritance tax payable was estimated at £20 million, but the Queen did not have to pay because in 1993 an agreement with John Major meant that inheritance from a ‘sovereign to sovereign’ is exempt from the tax. The main reasoning behind the exemption was the need for the sovereign to avoid erosion of the Royal Family’s wealth.
In 2007 there were further developments when spousal exemption was introduced. Previously if a spouse or civil partner left their estate to the other partner, it cancelled out one partner’s tax free allowance. The current position is that you can transfer any unused Inheritance Tax threshold from a late spouse or civil partner to the second partner when they die. This can increase the Inheritance Tax threshold of the second partner from £325,000 to as much as £650,000.
In 2010 the nil-rate threshold was increased to £325,000 tax free. If your estate does attract inheritance tax (eg as your estate is not left to your spouse/civil partner) it will be taxed at a rate of 40% ( 36% if you donate at least 10% to charity). This threshold limit is frozen until April 2015. It was believed that in the Autumn statement George Osborne would increase the IHT threshold, but no such luck – however he did say he would exempt emergency workers and humanitarian aid workers from future IHT bills if they are killed in active service.
Remarkably in some cases you can reduce your Inheritance tax liability fairly easily as long as you plan ahead. The best thing to do is to seek advice from one of our Private Law team on 08455 543700 and ensure you make a Will!