Despite being paid by only 4% of the population, inheritance tax has been voted Britain’s most hated tax.
Hargreaves Lansdown found that it is the least favorite tax of as many as four out of four people. This makes it less popular than income tax, national insitut, and VAT.
The second most hated tax is income tax, which includes income taxes and National Insurance. 17 percent of Britons consider this the most despised levy.
One in four people hate inheritance tax.
Sarah Coles, Hargreaves Lansdown personal finance analyst, said that while tax is not something people enjoy, they are willing to accept it as a fact. However, some people inspire deep hatred in millions of us.
‘Our hatred of inheritance tax belies the fact that in reality only 4 per cent of people pay it, and that of the £334.3billion taken in tax between April and September this year, just £3.1billion of it was inheritance tax.’
She says, “Rather than being an irritation about how it affects us personally, it’s often more of an ideological resentment.”
“People don’t like to think about money they’ve already paid taxes on being taxed again. They want their loved ones’ legacy to be more important than the taxman.”
But while it is only paid by 4 per cent of people, the amount taken in by the taxman has nearly doubled in a decade, from £2.9billion in 2011/12 to £5.2billion in 2020/21.
The survey also revealed that capital gains tax, which is tax on investments, was joint third on most despised tax lists. 15% of respondents voted for it as their most hated taxation.
| Tax | % of Britons hate it most |
|---|---|
| Inheritance tax | 24% |
| Income taxes | 17% |
| Spending is subject to tax | 15% |
| Investments subject to tax | 15% |
| Sin taxes (sugar, alcohol, petrol) | 10% |
| Taxes on property purchases | 8% |
| Property investments are subject to tax | 4% |
| Other taxes | 6% |
Men are more likely than women to resent spending tax (18%) compared with 13% of women. Women are more likely hate inheritance tax (27% versus 22%).
There are concerns about tax increases with Wednesday’s budget. This is because the Government seeks to recover the funds spent fighting Covid.
The Government borrowed £320billion in the year ending April 2021, which is the highest figure recorded outside of wartime and economists expect the government will borrow a further £180billion by the end of this tax year.
As the Chancellor considers possible tax changes in the budget we take a closer view at inheritance tax as well as tax on investments and the likelihood that any will rise on Wednesday.
Inheritance tax
What is it?
Inheritance Tax is a tax on an estate of someone who has died.
Inheritance tax is charged at 40% above the tax-free allowances everyone receives on their estate, also known as nil rates bands.
This is made up of the standard nil rate band of £325,000 per individual – of which any unused element can be passed on to a spouse or civil partner, effectively doubling their allowance to £650,000.
| Tax | Tax year | Total raised | % of all UK tax receipts | Average household cost |
|---|---|---|---|---|
| Inheritance tax | 2019/20 | £5.1 billion | 0.6% | £170 |
| Income tax | 2019/20 | £193.6 billion | 23.4% | £6,800 |
| National Insurance | 2019/20 | £145 billion | 17.5% | £5,100 |
| Tax on spending (VAT). | 2019/20 | £134 billion | 16.2% | £4,700 |
| Capital gains tax | 2019/20 | £9.8 billion | 1.2% | £340 |
| Source: Office for Budget Responsibility |
Under current rules, if you give away the family home to direct descendants, a total of £500,000 each, or £1million combined, is the maximum value that a married couple or civil partners’ estate can reach before it starts being liable for the 40 per cent inheritance tax rate.
In total, this means property-owning spouses can benefit from a £1million buffer before their estate incurs inheritance tax.
| Tax year | Government inheritance tax receipts (£billion) |
|---|---|
| 2011/12 | £2.90billion |
| 2012/13 | £3.11billion |
| 2013/14 | £3.40billion |
| 2014/15 | £3.80billion |
| 2015/16 | £4.65billion |
| 2016/17 | £4.82billion |
| 2017/18 | £5.21billion |
| 2018/19 | £5.36billion |
| 2019/20 | £5.12billion |
| 2020/21 | £5.33billion |
| Source: HMRC/NFU Mutual | |
If the total value of an estate is worth £2million or more, the additional main residence nil rate band will be tapered at £1 for every £2 over the £2million threshold, meaning some higher value estates eventually lose the own home benefit altogether.
The seven-year rule, which is a key inheritance tax principle, is also important. This applies to gifts that are above set limits – for example, making more than £3,000 in gifts per year – and are known as potentially exempt transfers. If you live for more than seven years, such a gift is exempt from inheritance tax.
If someone dies within three to seven years of giving a gift, inheritance taxes on it will be reduced on a sliding scale.
Gifts of any size are allowed outside of the gifting allowances. They are known as potentially exempt transfer and can be made for inheritance tax purposes as long as you do not live for seven years after you hand it over.
If you die before the seven year period is up, your estate is subject inheritance tax rules. In this case, you will be required to pay tax on some.
Will it rise?
It is highly unlikely. Rishi Sunak, the chancellor of India, announced earlier this year that the inheritance taxes nil-rate bands would remain frozen until 2026.
By then, the £325,000 exemption would have remained frozen for 17 years.
Despite this, it is likely that more people will have to pay it as asset prices continue to rise.
HMRC revealed it collected £5.33billion from inheritance tax in the 2020-21 financial year, up from £5.12billion the year before.
| Between gift and death, years | Tax paid |
|---|---|
| Below 3 | 40% |
| 3-4 | 32% |
| 4 to 5 | 24% |
| 5-6 | 16% |
| 6 to 7 | 8% |
| 7 or More | 0% |
With average house prices having risen by £25,000 over the past year according to ONS figures, more people are finding themselves dragged over the threshold at which inheritance tax becomes due – largely due to the value of their property.
Experts believe the chancellor would rather target areas that are exempt from inheritance taxes, such as agricultural land.
Graham Boar is a partner at UHY Hacker Young chartered accountants. He says, “It’s unlikely there’ll be an increase in inheritance tax headline rate, which is already very high at 40%.”
‘If the government wants to take Inheritance Tax out of control, it’s much more likely to remove or reduce Business Property Relief or Agricultural Relief.
These reliefs protect certain assets from Inheritance tax and can allow for large amounts of wealth to be passed down without any charges.
“There’s been criticism of these reliefs being applied too generously right now, which makes it easier for the Government to target them than increasing IHT’s headline rate.
Income tax
What is it?
The income tax includes income tax as well as National Insurance.
Taxes on different forms of personal income provide the biggest source of revenue for Government with income tax raising £193.6billion in the 2019/20 tax year.
Income tax is the tax you pay on regular earnings. This includes income earned as an employee, or as a result of self-employment.
| Band | Taxable income | Tax rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basis rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £150,000 | 40% |
| Additional rate | over £150,000 | 45% |
It can be rental income if you are a landlord or interest earned on savings. It is also charged on certain state benefits like job seekers allowance, most pensions, and the state pension.
You begin paying income tax if you earn above £12,570 in a given tax year – up until this point everyone has a personal tax free allowance.
However, your personal allowance goes down by £1 for every £2 that your income is above £100,000 meaning your allowance becomes zero if your income is £125,140 or above.
Your income between £12,571 and £50,270 is taxed at the basic rate of 20 per cent whilst income between £50,270 and £150,000 is taxed at the higher rate of 40 per cent.
Those earning £150,000 or more are taxed at the additional rate of 45 per cent on all income received above that level.
| Who pays? | How much is it? |
|---|---|
| Employees earning more than £183 per week | 12% (or 2% if you earn over £262 a week) |
| Employers for employees earning over £183 per week | 13.8% |
| Self-employed people earning over £6,515 a year | Flat £159 per year |
| Self-employed people earning over £9,568 a year | 9% (or 2% if you earn over £50,270) |
| Source: TaxScouts |
In addition to income tax, we also contribute to national insurance in order to be eligible for certain benefits or the state pension.
You will pay this if you’re an employee earning above £184 a week or self-employed making a profit of £6,515 or more a year.
National insurance is currently charged at a rate of 12 per cent on earnings between £184 and £967 each week and at 2 per cent on earnings over that – although this is set to rise from April next year.
Will it rise?
National insurance is set to increase by 1.25 % from next spring, from 12.5% to 13.25 %.
Despite the Conservative party promising not to increase taxes in its 2019 manifesto, this was achieved.
The increase will mean a worker who earns £30,000 a year will have to pay an extra £255 in tax while a worker who earns £50,000 will pay an additional £505.
National insurance will rise by 1.25 percentage points from 12 to 13.25 percent starting next spring
High earners with a salary of £100,000 will have to pay an extra £1,130.
Few commentators anticipate the Government to raise income taxes or announce a new rise in national insurance.
Richard Brooks, MHA Monahans’ private tax advisor, says: “No one can predict what will happen on 27 Oct. However, it is unlikely that government will increase income tax and national insurance for the 2022 fiscal year because of its commitment to the UK as a low-tax jurisdiction.
Boar says: “The Chancellor has a huge gap to fill in the country’s finances and it would seem tempting for him to increase income tax, even by 1%, as this would raise an enormous amount of money.
‘But it is highly unlikely that theChancellor will take this route as it would prove to be immensely unpopular. An increase in income taxes would affect almost everybody, not just those who are wealthy.
“The Chancellor caused a lot of ripples already by his raid against National Insurance Contributions.”
Investments subject to tax
What is it?
Tax on investments usually refers to capital gains tax, but in the case stock and shares, it will also often include dividends.
Capital gains tax may be applied to any profit you make from an asset that has increased its value, whether you sell it, gift it or transfer it to someone else.
You are only required to pay capital gains tax if the gain you make exceeds your £12,300 tax free allowance in a single year.
For investments such as stocks or shares, basic rate taxpayers pay 10% if they exceed their personal allocation, while higher rate taxpayers and additional rate taxpayers are charged 20%.
It is also worth noting, that crypto assets like bitcoin are subject to capital gains tax at this rate.
Capital gains tax on residential property is currently charged at 18% for basic rate taxpayers, and 28% for higher rate taxpayers. However, when you sell your main residence, you are completely protected from this tax by principal private residence relief.
If you make more than £2,000 in dividends outside an Isa, or realise more than £12,300 in capital gains in a single year, you will need to pay tax.
To minimize any potential capital gains tax and dividends tax bills, the best way to do so is to fully use your Isa allowance every tax year.
Shaun Moore, a tax and financial planning expert at Quilter, says that isas should be an investor’s or saver’s best friend when it concerns tax efficiency.
‘It should be used as much as possible up to the annual £20,000 allowance to shield savings and investments from capital gains tax, income tax or dividends tax.’
Will it rise?
As with national insurance, the dividend tax rate will rise to 1.25 percent starting April next year. Basic rate taxpayers will start paying 8.75 %, while higher rate taxpayers, 33.75 %.
Therefore, the government may not alter it prior to the increase going into effect.
However, speculation arose that the capital gains tax would rise prior to the last budget. This has led some people to speculate that it could have been targeted this time.
Last year, the Institute for Public Policy Research think-tank estimated that a capital gains tax rise could raise an extra £90billion over five years, which would certainly help with the UK’s spiralling debts.
In November 2020, the Office of Tax Simplification released a report recommending that capital gains tax rates should be increased to align them with income tax.
Chief executive of TaxScouts Tram Abramov says: “In terms of a prediction about this coming Budget, there have been talks for some time about capital gain tax levels being brought closer to income tax levels. Which they’d likely justify as a way of generating revenue and simplifying the tax system.
Some further analysis shows that capital gains tax is decreasing.
In the 2019/20 tax year, just £9.3billion of capital gains tax was paid on gains worth £62.7billion, according to research by accountancy group, UHY Hacker Young.
This means that capital gains from the past tax year were subject to an effective rate only of 14.9 percent tax. This is a decrease of 16.5 percent a decade ago.
People are becoming more aware of the various reliefs available and making better use of them. This is likely to lead to a decrease in the effective tax rate.
Boar states that the effective rate of capital gains taxes paid is decreasing suggests that many investors are making full use of tax reliefs.
‘While they are within their rights to do so, it is affecting HM Treasury’s desire to maximise tax revenue.
“Clamping down even more on capital gains tax reliefs seems like a natural next step, in addition to looking at the headline rates.”