History of inheritance taxes in the United Kingdom


The history of inheritance taxes in the United Kingdom has undergone significant change and mutation since their original introduction in 1694.

Duties before Finance Act 1894

Probate duty was introduced as part of the Stamps Act 1694, in order to help finance England's involvement in the War of the League of Augsburg. It originally applied to all probates of wills and letters of administration for personal estates valued greater than £20, at a fixed duty of 5 s.. It was converted into a graduated rate in 1780 by Lord North, as a consequence of financing British activity in the American Revolutionary War. Penalties for failing to file probate or administration documents were introduced in 1795, and accounts for calculating liability were first required in 1805. As probate and administration were unknown in Scotland, inventory duty was introduced in 1804 to provide for similar liability there. Ireland introduced probate duty separately in 1774.
Legacy duty was also imposed in 1780, initially upon receipts or discharges given with respect to a legacy. As receipts were not in practice given or required, revenues were insignificant until William Pitt the Younger reformed the regime to require executors to account for the property in question, as well as varying rates according to the type of collateral succession. Further measures and later court decisions clarified the duty's extent.
Probate and legacy duty focused on the of the estate, as opposed to its, thus excluding real property from taxation. Neither duty captured property passing by way of settlement, which was outside the scope of probate and administration. Succession duty was introduced by William Gladstone as a measure to capture more unearned wealth at the point of succession that would not otherwise be chargeable to legacy duty. In that regard, real property was included in its scope, but only on the life interest therein, as opposed to its full market value. Leasehold interests were excluded from legacy duty, thus having them fall within the new duty.
The administration of legacy and succession duties was integrated in 1881, with the requirement that no probate or letters of administration would be granted by the Court if a court officer cannot certify that an affidavit has been filed stating the estate's value and stamped where liability for duty is shown. Relief from legacy and succession duties at the rate of 1% was allowed on such affidavits and inventories filed and stamped, and a penalty equal to double the amount of duty due was imposed on any person failing to file them on time. Account duty was also introduced, charging certain gifts and voluntary settlements to be taxed.
Additional succession duties were introduced in 1888:
Corporation duty was imposed in 1885, and a temporary estate duty in 1889, to encompass activities which the previous duties had not captured.
DutyScopePaidRate
Probate duty
  • all testate and intestate estates, with respect to personal property only
  • where the deceased had UK domicile, debts and funeral expenses can be deducted from the gross value of the estate
  • duty payable on all inventories, affidavits for probates and letters of administration, which must be obtained within six months after the decease
  • By executor or administrator of estate
  • for estates less than £100, nil
  • between £100 and £500, £1 per £50 or part thereof
  • between £500 and £1000, £1 5 s. per £50 or part thereof
  • above £1000, £3 per £100 or part thereof
    • But, where the gross value of the personal estate is less than £300, a flat rate duty of 30 s. is payable on such estates valued between £100 and £300, which also satisfies any liability for legacy or succession duty.
    Legacy duty
    • Imposed on all deceased persons with UK domicile.
    • Initially imposed in 1780 as a duty on "every receipt or other discharge for any legacy," it was expanded in 1796 to include "every share or residue of the personal estate of any person dying and leaving such estate of the clear value of £100 or upwards." However, the 1796 Act also declared that money left to pay legacy duty was not chargeable to duty as a legacy.
    • In 1805, duty is charged on legacies charged upon or made payable out of any real estate, or out of any moneys to arise from the sale of real estate.
    • In 1815, duty was expanded to include the devolution of personal estate under a partial or total intestacy.
    • In 1823, it was held that the forgiveness of debt due to a testator constituted a legacy.
    • In 1845, the definition of "legacy" was expanded to include gifts made by will or testamentary instrument, as well as gifts made as donatio mortis causa.
    • Only the will can determine what constitutes a legacy, and any secret trust outside it cannot change who the legatee is.
    • A bequest upon the trusts of a settlement, even if in satisfaction of a covenant, is chargeable with duty, the trusts in effect being incorporated in the will.
    • In cases where property is disposed by way of a power of appointment, it has been held that a power arising from a will, will constitute a legacy, but one arising from a deed will constitute a gift not subject to duty.
    • Rentcharges will give rise to duty, but it must be in general a charge in favour of one person on the estate of another.
    • The gift of the next presentation to a living is a legacy, but the gift of an advowson is not.
    • A general direction to sell land will render it liable to legacy duty, unless coupled with a direction to invest the proceeds in other real estate, or where a sale is made by order of the Court for purposes unconnected with the trust.
  • At the time of transfer of the legacy.
  • Generally paid by the executor or administrator; otherwise, if received without deduction of duty, by the relevant trustee or legatee.
    		• Where any legacy, residue or any share of residue is greater than £20:
    • to any child, lineal descendant, parent or lineal ascendant, 1%
    • to any brother or sister, or any of their descendants, 3%
    • to any brother or sister of a parent, or any descendant of them, 5%
    • to any brother or sister of a grandparent, or any descendant of them, 6%
    • to all other persons, 10%
    Succession dutyApplies to every succession to the beneficial enjoyment of any real or personal property, or to the receipt of any portion or additional portion of the income or profits thereof, upon or in consequence of the death of any person.
    • Disposition arises from any limitation, provision, condition or other act of man, written or unwritten, by means of which property is disposed of in favour of any particular person, body corporate, company or society named or sufficiently pointed out in such disposition.
    • Devolution by law arises from the operation by which the law, in the absence of any act of man, carries property to particular persons, such as in the case of intestacy.
    • The succession to be taxed is the right to possession.
    • The beneficial interest accruing to a surviving joint tenant is deemed to be a disposition, except where the joint tenants are husband and wife, as they hold the status of tenants by the entirety
    • An increase in benefit arising from the extinction of any charge, estate or interest in property by the death of a person or at any period ascertainable only by reference to such death is deemed to be a succession, but this does not apply to persons who, at the passing of the SDA 1853, possessed estates subject to outstanding leases for lives, or purporting to be leases at rack rent
    However:
    • Property may escape the tax forever by always passing inter vivos, but will be taxed when a succession accrues
    • Property is exempt where it is already subject to legacy duty, or is already exempt therefrom
    • Where the deceased does not have UK domicile, personal property in the estate will not be subject to succession duty, but where the resulting will creates a trust that assumes the character of a British settlement and British property, it is liable to duty upon the death of any person who has a limited interest in it
  • At the time the successor, or any person in his right or on his behalf, becomes entitled to possession of the property.
    • The value to be included is:
    • For personal property, the total value thereof
    • For real property where the successor is a body corporate, company or society, the principal value of the property
    • For all other cases of real property, excepting advowsons and timber, the value is considered to be in the nature of an annuity equal to the net annual value of the property, to be ascertained at the time the interest of the successor accrues
    • In the case of a succession comprising timber, the value is the sum of the yearly rental in its uncultivated state, plus the net moneys derived from the sale of timber where they exceed £10 per year
    • Duty arises on an advowson only where a sale is made
  • In general, the same schedule of rates as for legacy duty.
  • However, where any person chargeable with succession duty with respect to any succession shall have been married to any wife or husband of nearer consanguinity than himself or herself to the predecessor, testator or deceased person, then the person taking such succession shall pay the same rate of duty as his or her spouse would have been chargeable with as if he or she had taken the succession directly.
    • Account dutyPersonal or moveable property, being:
    • property taken as donatio mortis causa, or as an immediate gift inter vivos made within three months of death
    • property, to which a person was absolutely entitled, which was vested in joint tenancy that accrues or passes by survivorship upon death
    • property passing under any past or future voluntary settlement, by deed or any other instrument not taking effect as a will, where the settlor reserved the right to take back the absolute interest in the property
  • a beneficiary, trustee or any other person who acquires possession or assumes the management of any property included in the account
  • for estates between £100 and £500, £1 per £50 or part thereof
  • between £500 and £1000, £1 5 s. per £50 or part thereof
  • above £1000, £3 per £100 or part thereof
    • Any stamp duty of 5 s. per £100 previously paid on a deed of voluntary arrangement of property included in the account is to be returned upon production of the settlement.
    Corporation duty
    Income earned from all real and personal property vested in a body corporate or unincorporate, other than property vested in:
    • Any government authority
    • Any religious persuasion or charitable purpose
    • Any friendly society or savings bank
    • A body corporate or unincorporate established for any trade or business, or any body whose capital stock is divided and held to be subject to legacy duty or succession duty
    Property acquired by subject bodies corporate or unincorporate with funds contributed within the previous 30 years, whether voluntarily contributed or where legacy or succession duty had been paid thereon, is exempt from such duty.
    "Body unincorporate" includes every unincorporated company, fellowship, society, and association. It also includes a trustee or trustees of a permanent trust into which property has been vested in circumstances where it was not liable to legacy or succession duty.
    • All bodies subject to the duty.
  • 5% of the net income concerned
    • Estate dutyEstates and successions greater than £10,000 in value
    • In the case of estates, any person filing probate or letters of administration, or exhibiting an inventory in Scotland
    • In the case of successions, the successor
  • £1 per £100 or part thereof, payable on the entire value, in addition to any other duty

    • Estate duty framework (1894-1949)

    The succession duty's taxation of the life interest in real property, as opposed to its full capital value, was seen to be unfair to heirs of different ages, as elder heirs effectively received a life interest that was lower in value than one received by a younger heir, even when they were shares in the same property.
    In his famous 1894 budget, William Harcourt further noted the unfairness of the system that had developed:
    In the Finance Act 1894, estate duty replaced probate duty, account duty, certain additional succession duties, and the 1889 estate duty. It was collected in addition to the legacy duty and succession duty which still remained in effect.
    With respect to real property, succession duty ceased to be calculated on the value of the life interest in the succession, being instead based on the principal value of the property after deducting the liability for related estate duty, together with expenses incurred in raising funds for paying it.
    DutyScopePaid byRate in 1894
    Estate dutyAll property passing on the death of the deceased, at its market value at the date of death, including:
    • the deceased's free estate
    • property situated outside the United Kingdom
    • property of which the deceased was competent to dispose
    • donations mortis causa
    • gifts inter vivos
    • property owned jointly or purchased and invested in joint names
    • insurance policies, annuities and other interests purchased by the deceased
    • property in which the deceased or any other person had an interest ceasing on the death of the deceased, to the extent that a benefit accrues or arises by his death
    • property comprised in a settlement
    In this regard, "property passing on the death" includes property passing either immediately on the death or after any interval, either certainly or contingently, and either originally or by way of substitutive limitation, and the expression "on the death" includes "at a period ascertainable only by reference to the death".
    However, the following property is exempt from duty:
    • gifts inter vivos made in consideration or contemplation of marriage, for public or charitable purposes, which form part of the normal expenditure of the deceased, or which amount to less than £100 per donee
    • settled property upon which probate duty or account duty was paid on the death of the deceased's spouse
    • immoveable property located outside the UK
    • moveable property outside the UK, where the deceased has no UK domicile
    • property held by the deceased in the capacity of an officeholder, recipient of charity or as a corporation sole
    • property passing by reason of sale or lease for full money consideration
    • property held by the deceased merely as a trustee
    • property of soldiers, marines and sailors who are killed or die in Her Majesty's service
    • estates of soldiers who are killed or die in service, not over £5,000, provided that they are given to the widow and children concerned
    • works of art given for national purposes, for which Her Majesty's Treasury has remitted the duty
    • similar articles of national, scientific, historic or artistic interest, until sold
    • pensions and annuities granted by the British and Indian governments to widows and children of deceased officers
    • advowsons and Church patronage
    • a single annuity, not exceeding £25, purchased or provided by the deceased
    • interests in expectancy sold or mortgages for full consideration in money before the introduction of estate duty
    • property settled by a husband or wife before the introduction of estate duty, where the income was enjoyed by the deceased spouse and the property then accrues to the settlor for life
    • enlargement of interest in property which would have otherwise passed
    • reverter to the of property which would have otherwise passed
    • real estate to the rents of which the deceased was entitled in right of his wife
    • timber, until sold
    • war securities held by foreigners
    • allowances with respect to other duties already paid
    		The estate, but:
  • the executor accounts for all property subject to the duty,
  • he must pay duty on all property that has passed to him, and
  • the rest of the duty must be paid by the beneficiaries and trustees concerned
    		• Where the principal value of the estate:
    • exceeds £100 and does not exceed £500, 1%
    • exceeds £500 and does not exceed £1,000, 2%
    • exceeds £1,000 and does not exceed £10,000, 3%
    • exceeds £10,000 and does not exceed £25,000, 4%
    • exceeds £25,000 and does not exceed £50,000, 4.5%
    • exceeds £50,000 and does not exceed £75,000, 5%
    • exceeds £75,000 and does not exceed £100,000, 5.5%
    • exceeds £100,000 and does not exceed £150,000, 6%
    • exceeds £150,000 and does not exceed £250,000, 6.5%
    • exceeds £250,000 and does not exceed £500,000, 7%
    • exceeds £500,000 and does not exceed £1,000,000, 7.5%
    • exceeds £1,000,000, 8%
    For small estates, the following reliefs apply:
    • a fixed duty of 30 s. applies where the gross value is greater than £100 but does not exceed £300
    • a fixed duty of 50 s. applies where the gross value is greater than £300 but does not exceed £500
    • for all estates where the net value does not exceed £1,000, settlement estate duty and the legacy and succession duties will not be payable
    Settlement estate dutyAdditional duty, charged where property in respect of which estate duty is leviable is settled by will of the deceased, or having been settled by some other disposition is passed on death of the deceased, to some other person not competent to dispose of the property.The estate, but:
  • the executor accounts for all property subject to the duty,
  • he must pay duty on all property that has passed to him, and
  • the rest of the duty must be paid by the beneficiaries and trustees concerned
    		• 1% for every £10 of the value of the settlement, or part thereof where such part is deemed to be a full £10
    Settlement estate duty was increased to 2% by the Finance Act 1909–10, and was later abolished by the Finance Act 1914.
    Estate duty was designed to be a progressive tax. It became more highly progressive over time, with the highest marginal rates fixed as follows:

    Estate duty (1949-1975)

    The complexity and unfairness in how the duties were applied was discussed by Stafford Cripps in his 1949 Budget speech:
    Accordingly, legacy duty and succession duty were abolished by the , followed by the repeal of corporation duty by the . The three-year period for gifts made prior to death was extended to five years by the , and then to seven years by the .
    Estate duty became more progressive in scale, eventually peaking in 1969 with the highest marginal rate fixed at 85% of amounts in excess of £750,000, provided that total duty did not exceed 80% of the value of the total estate.

    Capital Transfer Tax (1975-1986)

    Estate duty was criticised for failing to capture the value of gifts made more than seven years before a person's death, as well as that of any property vested in trusts prior to death. In his 1974 Budget speech, Denis Healey, then Chancellor of the Exchequer, declared:
    This was implemented with the passage of the , which abolished estate duty and created the capital transfer tax, with the following characteristics:
    CTT was reduced in scope during the Thatcher years, with the rates applicable to gifts adjusted to encourage business property to be given during a lifetime, and a ten-year accumulation period introduced to cap the effect of graduated rates.

    Inheritance tax (1986 to present)

    , in his 1986 Budget speech, moved to abolish the tax on lifetime gifts altogether, explaining:
    This was implemented in the .

    Estate on death

    For IHT purposes, a person's estate includes:
    1. the aggregate of all the property, other than excluded property and specified interests in possession, to which he is beneficially entitled;
    2. beneficial entitlement includes the general power to dispose or charge money on any property;
    3. except where otherwise provided, the person's liabilities must be taken into account, but it does not include liability with respect to any other tax that may arise on the transfer, and a liability incurred by a transferor shall be taken into account only to the extent that it was incurred for a consideration in money or money's worth.
    Excluded property comprises:
    1. property situated outside the United Kingdom, where the person beneficially entitled to it is an individual domiciled outside the United Kingdom;
    2. decorations and awards granted for valour or gallant conduct, and which have never been the subject of a disposition for a consideration in money or money's worth; and
    3. certain specified securities.
    Relief is also granted, where the value of the estate is reduced with respect to specified business property, agricultural property, woodlands, certain transfers made within three years of death made at a diminished value, and certain other cases.

    Chargeable transfers prior to death

    Deductions will be made from an estate's nil rate band with respect to transfers of value made in excess of specified limits, other than "potentially exempt transfers" made more than seven years before the transferor's death. Transfers of value made within specified limits are known as "exempt transfers".
    Transfers of value will also include gifts arising from the amount by which an asset is sold for less than it could have been sold on the open market, as for a sale from a parent to a child. Gifts can also arise where:
    Where the value of such transfers exhausts the amount available to the nil rate band, IHT is assessed on the excess amount, to which the recipients of such transfers bear the liability to pay.

    Rate of tax

    Tax is assessed at 40% of the net value of the estate, after application of the nil rate band. The applicable nil rate band will depend on the date of death: if the date falls at any time from 6 August to 5 April in a given tax year, the current year's band will apply; but, where the date is after 5 April but before 6 August, and application for a grant is filed before 6 August, the prior year's band will apply.
    For deaths occurring after 5 April 2012, the tax is assessed at 36%, where at least 10% of a specified baseline amount of the estate has been bequeathed as charitable gifts. For purposes of calculation, the property of the estate is separated into three components, each of which is tested to see if the charitable gifts are sufficient to qualify for the lesser rate:
    If applicable gifts meet the 10% threshold for a given component, in certain circumstances, upon election, the 36% rate applies to the whole estate. There are several options available for estates to be able to achieve that threshold, such as having the will specifying relevant gifts in terms of percentages of assets, or successors executing a deed of variation to attain the desired result.

    Additional nil rate band on main residence

    In the summer budget of 2015 a new measure was outlined to reduce the burden of IHT for most families by making it easier to pass on the family home to direct descendants without a tax charge. It came into effect upon the passage of the Finance Act 2015, and provided for the following scheduled amounts:
    The Finance Act 2016 provided further relief in cases where all or part of the additional band could be lost, where a person had downsized to a less valuable residence or had ceased to own a residence after 8 July 2015. This is conditional upon the deceased having left that smaller residence, or assets of equivalent value, to direct descendants. These are defined as lineal descendants, spouses or civil partners of such lineal descendants, or former spouses or civil partners who have not become anyone else's spouse or civil partner.

    Pre-owned assets

    Effective with the 2005-06 tax year, the Finance Act 2004 introduced a retrospective income tax regime known as pre-owned asset tax which covers transactions not made at arm's length, where a person either:
    and then subsequently benefits from its use.
    The person liable for POAT may, while he is still alive, elect on a timely basis to have such transactions treated as gifts with reservations with respect to such transactions made in a given tax year.