Flat rate death tax would leave most UK families paying more
Key Points
- A flat 10% death tax replacing inheritance tax would raise bills for most UK estates and cut them for the largest.
- Fewer than 5% of UK estates pay inheritance tax now, thanks to the £325,000 nil rate band and the £175,000 residence nil rate band.
- Couples leaving more than roughly £1.35 million would gain under a flat rate; smaller estates would pay far more than they do today.
- Estates worth over £2 million currently face effective rates of around 25% and would see the biggest savings.
- Frozen allowances until April 2031 mean more UK families will pay inheritance tax even if the rules stay as they are.
Most UK families would pay more under a flat 10% death tax replacing inheritance tax, analysis of the latest HMRC figures by wealth management firm SW Group shows.
The government has been widely reported to be weighing a flat rate levy on all estates as a way to fund social care reform, with a National Care Service estimated to cost an additional £18.5 billion a year and rising.
Such a charge would sweep away the current reliefs and allowances and apply to every estate. Inheritance tax raised £8.5 billion last year, but fewer than 5% of estates pay it.
Two allowances keep most families out of the tax altogether. The nil rate band stands at £325,000 and the residence nil rate band covers the main home up to £175,000.
Both transfer on the first death where the surviving spouse is the beneficiary, so many couples can currently pass on up to £1 million free of inheritance tax, and more where they own agricultural property or a business.
Taking those £1 million reliefs as a rough measure, and assuming transfers between spouses and civil partners stay exempt, the crossover point sits at around £1.35 million.
A couple leaving that much would see a £140,000 bill under the current regime fall by £5,000 under a flat rate. Everyone below that line would pay more, and in many cases far more.
Effective rates and who pays them
HMRC recorded 30,400 estates paying inheritance tax in 2023/24, or 4.72% of the 644,000 UK deaths in that period. That is the highest proportion since a peak of 5.96% in 2006/07.
The average bill came to £231,000, a figure pushed up by the residence nil rate band lifting smaller estates out of the tax entirely.
The headline rate is 40%, but the allowances mean estates do not pay it on their full value. Across all estates paying inheritance tax in 2023/24, the average effective tax rate was 13%.
For the smallest paying estates, those with net assets between £300,000 and £400,000, the effective rate was 4%. Just 2,300 estates fell into that band and they paid an average of £13,800 each; under a flat rate they would pay at least £30,000.
The effective rate climbs with size and reached 12% for the 7,770 estates valued between £1 million and £1.5 million, which paid an average of £151,000.
It rose to 19% for the 2,930 estates worth between £1.5 million and £2 million, which paid an average of £324,000 against a maximum of just under £200,000 under a flat rate. It peaked at 25% for the 3,156 estates valued from £2 million, the point at which the residence nil rate band tapers away, up to £7.5 million.
Average bills in that top group ranged from £557,000 for estates worth £2 million to £3 million, up to £1.49 million for those worth £5 million to £7.5 million. A flat rate would cap their bills between £200,000 and £750,000.
Above £7.5 million the effective rate has traditionally fallen, to 23% for estates worth £7.5 million to £10 million and 18% for those above £10 million.
Greater use of business property relief explains the drop, and after the spouse and civil partner exemption it was the second largest relief set against assets in 2023/24. Business property relief and agricultural property relief together covered £5.96 billion of assets that year, against inheritance tax liabilities of £7.03 billion.
The 364 estates in the two highest bands still paid average bills of £1.99 million and £4.72 million, and both groups would save heavily under a flat rate.
What is changing?
The nil rate band and residence nil rate band stay frozen until April 2031, beyond the current parliament, so the number of estates paying will keep rising regardless.
Unused pension funds count towards the value of an estate from April 2027, and the restrictions on agricultural and business property relief that took effect in April 2026 will pull in more estates again.
A flat rate and the removal of the nil rate bands would widen the tax base far more sharply.
Inheritance tax is already the most disliked tax in the UK, with 54% of respondents to a poll commissioned by the Financial Times last year wanting it abolished outright, most of them people whose estates would never pay it.
SW Group said a universal charge that also cut bills for the wealthiest estates would be a hard sell, and that a flat rate death tax looks like a step too far for the Prime Minister and Chancellor.
