Inheritance tax has been crowned as the most unfair levy by taxpayers just days away from the Autumn Budget, new research reveals.
More than half of households blasted death duties as unfair, more so than capital gains tax, alcohol duty and income tax, according to financial firm Canada Life.
Its figures reveal 54 per cent of adults think it is unfair, compared to just 22 per cent who claim it is justified.
It comes amid the possibility that inheritances could be targeted once again by Chancellor Rachel Reeves in next week’s Budget.
Reeves already launched an attack on grieving families in the 2024 Budget, when she announced unused pension pots, which can currently be passed on tax-free, would be pulled into a person’s estate for tax purposes from April 2027.
This time around, the Treasury is set to launch a further raid on family finances.
Among the rumours is a cap on the amount which can be gifted free of inheritance tax during someone’s lifetime, which is currently limitless as long as the donor survives for seven years after making the gift.
Ms Reeves could also hike this seven-year rule to ten years, which will drag more hard-earned cash into the tax net.
Disliked: Some 54% of 2,000 adults think inheritance tax is the unfairest levy compared to just 22% who think it is just
IHT is levied at 40 per cent on any part of an individual’s estate over the £325,000 threshold, including property, savings and other assets.
Those who leave their property to direct descendants have an extra £175,000 tax-free allowance.
Allowances can also be passed on to a surviving spouse, meaning a couple could leave behind a total estate of £1million free of IHT.
However, the £325,000 nil-rate band has been frozen since 2009 and will remain so until at least 2030, which means the levy isn’t just reserved for the wealthiest of families anymore.
Rising house prices mean more middle-class families with modest legacies are being pulled into the death duty net as their homes soar in value.
It means that the exchequer is set to pull a record IHT haul of £9.1billion into its coffers this financial year, up from a record £8.2billion from 2024-25, the Office for Budget Responsibility forecasts.
Why is inheritance tax so hated?
Canada Life’s study found that, of those who deem IHT unfair, the most common reason was that the levy penalises people who have saved well and want to pass something on to loved ones (65 per cent).
Some 57 per cent claim it is ‘double taxation,’ as the person leaving the inheritance was already taxed on the money when they earned it.
Younger savers are more supportive of IHT compared to older generations, however.
For example, 42 per cent of Generation Z – those aged 13 to 28 – think it is unfair compared to 61 per cent of baby boomers (61 to 79 years old) who are more likely to have started planning their legacies.
John Chew, of Canada Life, says: ‘It’s clear from the research that inheritance tax is not an issue confined to the wealthy few.
With thresholds frozen since 2009, strong property growth, plus pensions coming into scope for IHT from 2027, more and more families will be finding themselves caught in the IHT net.
‘Conversations with loved ones about inheritance can be challenging, but they are essential. Professional financial advice can provide invaluable guidance when it comes to inheritance and estate planning – offering tailored support in what can be a complex area.’
Stamp duty second most-disliked
After IHT, stamp duty was the most hated as some 43 per cent of the 2,000 adults polled by Canada Life labelled it unfair.
Critics claim the tax is clogging up the property market as some homeowners feel unable to move for fear of paying the tax, which results in families living in unsuitably-sized homes.
The amount payable by buyers was hiked in April after the stamp duty holiday ended which has compounded pain for home movers, and further changes could be set for this November’s Budget, too.
Some 40 per cent of those surveyed also thought council tax – another area that could be ripe for reform – is unjust.
The fairest taxes are additional rate tax, tobacco and alcohol duty, and higher-rate tax, according to the survey.
Homes levy: Stamp duty was also said to be unfair by many in Canada Life’s survey
Little-known tricks to slash your tax bill
If you want to pass on any cash or material gifts, make them earlier instead of later to start the seven-year clock ticking.
If you die within seven years of making the gift, it won’t fall outside of your estate completely.
However, it could benefit from taper relief. The closer to the full seven years you survive, the less tax your estate needs to pay.
For a payment made in the last three years before death, the full 40 per cent is levied.
But any gifts made four to five years ago face a 24 per cent charge, while those made five to six years before your death have a 16 per cent IHT rate.
Those given six to seven years ago are charged at 8 per cent. Make payments sooner rather than later to lessen the chance that your loved ones will foot a huge 40 per cent tax bill.
> This is Money’s guide to inheritance tax: What families need to know
You can also make the most of your gifting allowances to pass on wealth tax-free while you are still alive.
Everyone gets a £3,000 annual gift allowance, which is exempt from their estate. You can carry it over from the previous year if you didn’t use the allowance, but this can only be done for one year. It means that between a couple as much as £12,000 can be given away completely free of inheritance tax.
But you can also give away an unlimited number of small gifts up to £250, so long as you haven’t used another IHT allowance on the same recipient.
Another trick to reduce the tax bill on your estate is to make a tax-free gift to someone getting married or entering a civil partnership.
You can give £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to anyone else.
But these gifts need to be made ‘in consideration of’ a marriage or civil partnership so payments must be made just before it takes place and not after.
Growing numbers of families are also considering putting life insurance policies into trust to pay any potential tax bill.
These pay out to your loved ones when you die and if they are placed correctly into trust they are treated as if they are not part of your estate – and therefore free of inheritance tax.
You can appoint one or more beneficiaries who will be paid the full policy sum when you die.
However, this can be a costly planning tool and may come with risks.
For example, you may forfeit the cover if you stop paying the premiums at any point.
Once you start paying it, it can be difficult to increase your cover should your IHT liability rise. Seek expert advice before going ahead.
Arguably the most generous allowance is known as gifts out of normal expenditure, where you can gift an unlimited amount of money.
Beware, there are strict criteria you must meet. The payment must be regular, out of income and must not affect your standard of living – and you must keep good records.
