The evolution of inheritance tax

The Early Years: Probate/Legacy/Succession Duties (1694 -1894)

The earliest recorded form of tax akin to modern day inheritance tax was known as Probate Duty. This was introduced in England in 1694 as part of the Stamps Act 1694, to provide financial assistance to the military in respect of their involvement in the War of the League of Augsburg. Initially, it was a fixed duty of 5 shillings (one crown, or a quarter of a pound) on estates over £20, but in 1780, it become a progressive tax that was calculated according to the value of personal assets excluding property or land. At the same time, a Legacy Duty was introduced which required legatees to pay what was essentially a gift tax on any legacy or qualifying moveable asset above £100. A Succession Duty was later imposed in 1853 which covered heritable (land and buildings) property and other moveable assets which were not covered by the Legacy Duty.

Inventory Duty was introduced in Scotland in 1804 to provide for a similar liability to that discussed above in England. This was in force until 1894, when it was superseded by the Estate Duty.

Streamlining the Process: Estate Duty (1894 – 1975)

Estate Duty was introduced in an attempt to merge and simplify the previous Probate, Legacy and Succession Duties. This was also a progressive tax charged at a rate depending on the value of the estate. In 1969, the rate peaked at an eye-watering 85% on amounts in excess of £750,000. Estate Duty faced criticism because the Succession' and Legacy Duties were still applicable, resulting in smaller estates sometimes paying more than larger estates, which were able to use lifetime gifting and trust arrangements to transfer their wealth. The Finance Act 1949 addressed this issue by abolishing the Succession and Legacy Duties. At the same time, the Finance Act 1949 extended the period that needed to pass for a gift to be exempt from Estate Duty from three to five years. This timescale was extended further, to seven years (essentially the position still in force today), by the Finance Act 1969.

Addressing Lifetime Gifting: Capital Transfer Tax (1975 – 1986)

In 1975, tactical lifetime gifting and trust structures were still considered an issue, allowing high-value estates to avoid paying Estate Duty. This led to the introduction of Capital Transfer Tax as a replacement for Estate Duty. Capital Transfer Tax targeted lifetime gifting by applying a sliding scale rate of tax, between 10% - 75%, on transfers made throughout a person's lifetime (and originally not subject to a seven-year cut-off) that were not otherwise exempt. This was heavily criticised for the detriment caused to enterprises in the UK, as it deterred people from passing on their businesses to their descendants.

The Modern Era: Inheritance Tax (1986 – Present)

After a short-lived existence, Capital Transfer Tax was superseded by Inheritance Tax (IHT). IHT scrapped immediate tax on lifetime gifts and instead reverted to a tapered charge on gifts over the nil rate band and made within seven years of death, similar to that applied in Estate Duty. For the first few years, IHT was charged at either a lower rate (30-35%), standard rate (40%) or higher rate (45-60%) depending on the value of the estate.

The Nil Rate Band (NRB) was then introduced in 1986 and provided individuals with a tax-free allowance of £71,000. This increased by an average of £20,000 each year until 2009, when the NRB was set at £325,000 and it has remained at that level since. If the NRB was adjusted for inflation, it would be £508,000 currently. 2009 also saw the introduction of the transferable nil rate band (TNRB) between spouses. This gave married couples a potential tax-free allowance of £650,000 on the second death. Any assets over the combined NRB on the second death would incur tax at 40%, subject to certain exemptions.

In 1988, IHT was fixed at a rate of 40% and this is still the rate today. In 2012, a reduced rate of IHT of 36% was introduced, which applies to the rest of an estate where a person leaves 10% or more of the "net value" of their estate to qualifying charities (the amount going to charities being completely exempt).

The Residence Nil Rate Band (RNRB) was introduced in 2017, offering an additional allowance of £100,000 on a person's "main residence", provided it is inherited by direct descendants, i.e. children, grandchildren. This RNRB has risen and is now capped at £175,000 per person or the value of the main residence (whichever is lower). The RNRB tapers for estates over £2m by £1 for every £2 that the total estate exceeds that threshold. Like the NRB, the RNRB can also be transferred to a surviving spouse if it is not used on the first death, giving a combined RNRB of £350,000 (and thus with combined basic NRBs total tax-free allowances of up to £1 million) on the second death.

The most recent significant changes to IHT were announced in the 2024 Budget. Currently, there is no limit on the value of assets that can qualify for Business Property Relief (BPR) or Agricultural Property Relief (APR) and be exempt from IHT as a result. However, from 6 April 2026 there will be a cap of £1 million of APR and/or BPR assets that can qualify for complete relief; and any surplus value over and above £1 million will incur IHT at an effective rate of 20%. Another significant change is that, starting from 6 April 2027, private pensions will be included in the value of a person's estate, whereas they are currently not considered for the purposes of IHT.