Introduction: What’s Being Proposed
Big news is circulating that the UK government may scrap Inheritance Tax (IHT) — widely considered one of the most hated taxes in the country. However, the proposal isn’t simply to remove it. Instead, it may be replaced with a new tax being referred to as the “death tax”, which works very differently from the current system. This article compares how Inheritance Tax works today against how the proposed death tax would work, and who is likely to benefit or lose out.
How Inheritance Tax Works Today: Nil-Rate Bands Explained
Under the current system, every individual in the UK has a set of tax-free allowances that reduce or eliminate Inheritance Tax on their estate:
- The nil-rate band: £325,000 per person
- The residential nil-rate band: £175,000 per person, provided the estate includes a main house worth at least that amount
For a married couple, both allowances are available twice — once for each spouse. This means a couple passing on an estate that includes their main house can potentially pass on a combined total of these allowances to their children with zero Inheritance Tax payable, even on an estate worth as much as £1 million.
Why Only 4–5% of Estates Currently Pay IHT
Because of these combined allowances, it’s estimated that only around 4–5% of estates currently pay any Inheritance Tax at all. That said, more people are expected to be drawn into paying IHT in future, partly because pensions are being brought into scope — a change expected to cause significant additional complications for estates that previously fell below the threshold.
The New “Death Tax”: A 10% Flat Rate
Because the current system allows most estates to pass on tax-free, the government isn’t collecting as much revenue as it wants. The proposed solution is to scrap the current Inheritance Tax system entirely and introduce a new tax — the death tax — charged at a flat rate of 10%, with no equivalent nil-rate band structure described.
1M Estate Example: £0 vs £100,000
To put the numbers into context, consider a £1 million estate:
| System | Tax on a £1 million estate |
|---|---|
| Current Inheritance Tax (using nil-rate bands) | £0 |
| Proposed Death Tax (flat 10%) | £100,000 |
For many families who would currently pay nothing under the existing allowances, this represents a significant new tax liability where none previously existed.
The Loophole: How Trusts Could Avoid the Death Tax
One of the most important — and controversial — aspects of the proposed death tax is how it interacts with trusts and other structures. Because the tax is triggered by death, assets held within a trust or similar structure may avoid the tax entirely, simply because a trust does not “die.”
As the reasoning goes: you can only tax someone if you know they own the asset. If assets are held within the right structures, there’s a good chance they could remain outside the scope of the death tax altogether.
Who Really Ends Up Paying?
This creates a two-tier outcome:
- Ordinary families without specialist advice — who previously paid £0 in Inheritance Tax thanks to the nil-rate bands — could suddenly face a £100,000 tax bill on a £1 million estate.
- Wealthier individuals with access to trusts and complex structures — who get the right advice — may continue to pay close to zero.
The result is that the tax burden could shift disproportionately onto people who haven’t taken advice or put planning structures in place, while sophisticated planning continues to shelter others from the charge.
History Repeating: The Dividend Tax “Levy” Broken Promise
There’s a precedent for being cautious about the stated purpose of new taxes. It’s worth comparing this to the increase in dividend tax from 7.5% to 8.75%, which was introduced alongside a rise in National Insurance, framed as a levy to fund social care for the elderly.
That levy was later reversed — under Boris Johnson and Rishi Sunak — despite the original promise that it would fund care for older people. The money was never ring-fenced for that specific purpose, and it’s argued this pattern is likely to repeat with the proposed death tax: rates introduced for good reasons (in this case, funding social housing and elderly care) tend to rise over time and don’t necessarily reach their intended purpose, because tax revenue generally goes into a general pot rather than being protected for a specific use.
The Real Cost: Selling Property to Pay the Tax
A death tax bill of £100,000 (or more, on larger estates) isn’t necessarily payable from spare cash. In many cases, the person inheriting would likely need to:
- Sell the property they’ve inherited to pay the tax bill, or
- Take out a mortgage on the property (if there isn’t one already) to cover the liability
Unanswered Questions: How Will Assets Be Valued?
Under the current Inheritance Tax system, an estate’s value is generally calculated on a net basis — gross assets minus mortgages or other debt. It’s currently unclear whether the proposed death tax would be calculated the same way, whether debt would be excluded, or how valuation would work in practice. This uncertainty is a key concern with the proposal as it stands.
Why Wealth Taxes Push People to Leave the Country
A broader concern raised is that significant changes in taxation — particularly wealth-related taxes — tend to cause people to leave the country altogether. This trend has already been observed across Europe, North America, Australia, and New Zealand. In many cases, people are willing to pay a fair amount of tax, but what they value most is consistency, understanding, and stability in the tax system — something that’s undermined when major changes are introduced unpredictably each time a new government or leader comes in.
Final Verdict: Is This a Good Idea?
Wealth taxes of this nature generally don’t tend to work as intended — they sound appealing in principle but often fail to deliver the outcomes promised, while creating unintended consequences such as capital flight and disproportionate impact on those without access to specialist planning. In this case, neither the current Inheritance Tax system nor the proposed death tax is viewed as a good outcome — both come with significant drawbacks depending on your circumstances.
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This article reflects the presenter’s personal views and analysis based on proposals reported at the time of recording. The “death tax” has not been confirmed as government policy and details, including valuation methodology and applicable exemptions, remain unknown. This is not personalised tax or estate planning advice — speak to a qualified tax advisor about how any proposed changes could affect your specific circumstances.
