The earliest form of what could be considered Inheritance tax was first recorded in 1694. “Probate Duty” was introduced in the Stamps Act 1694 as a way to help continue financing England’s involvement in the “Nine Years War” also known as “the War of the League of Augsburg” which had started in 1688. Probate Duty was charged at a fixed duty of 5 Shillings on an estate worth more than £20 and was applied for all personal estates where there was probate of wills or letters of administration.
Probate duty remained the same for 86 years until 1780 when Lord North, Chancellor of the Exchequer between 1767 and 1782, changed the way probate duty was charged to a graduated rate. That meant that the more money there was in an estate the higher the rate it would be charged. This change was the result of Britain’s involvement in the American Revolutionary war in which thirteen British colonies declared independence as the United States of America.
In the same year Lord North introduced Legacy Duty, this was a tax the beneficiary had to pay on receipt of their inheritance. However, this produced little revenue at first as it was not common practice to provide receipts for property nor was it legally required making it hard to monitor what was being given to whom. It wasn’t until William Pitt the younger reformed the regime and made enforcement more efficient by making executors account for the property in question that revenue of Legacy Duty become more significant.
In 1795 penalties were introduced for failing to file probate or administration documents, but it wasn’t until 1805 that it was required that you supply accounts for calculating liability. This could be considered the origins of the IHT application forms that are used today; similarly, penalties can still be applied to incorrect inheritance tax applications today.
Even with probate duty and Legacy Duty there were still some holes in the system which meant there was no tax in specific circumstance. William Gladstone introduced another type of duty called Succession Duty. This was introduced to account for wealth that was not accounted for under probate and legacy duty.
In 1881 probate duty and legacy duty were finally integrated and at the same time additional succession duties were introduced. This integration came with the requirement that an affidavit showing the estates value and its liability for duty had to be filed in order for probate or letters of administration to be granted. The penalty procedure was also updated so that estates that failed to file the affidavits and inventories in time would receive a penalty of double the amount of duty that was payable.
This is similar to the process to the one we use today as grant of probate is only granted after the correct probate application and Inheritance tax forms detailing the estate’s tax liability are submitted to the probate registry.
Although the procedure had been updated there was still a lack of cohesion and continuity in the probate system as new duties, laws and procedures had been changed or added at different points in order to try and close various loopholes.
William Harcourt, a British lawyer, and Journalist as well as acting as Chancellor of the Exchequer between 1892 and 1895, addressed the need for a reformed system after noting the unfairness in Succession tax that had developed due to the “here’s a patch, there’s a patch” method of handling the tax and its legislation. Specifically in relation to how heirs of different ages would be taxed in different ways for inheriting the same thing.
In 1984 Harcourt combined some of the types of duties and streamlined the difficult and complicated process to create Estate Duty and settlement estate duty. Estate duty was a progressive tax this meant that the percentage of tax you would pay on a taxable amount would increase the more that you were over your allowed amount. For example, an estate with a value of over £100 but under £500 would be charged 1% whereas an estate valued over £500,000 but less then £1,000,000 was charged at 8%. The percentage increased dramatically over the years and in 1946 estate duty was 75% on taxable amounts over £2,000,000.
Unfortunately, Harcourt’s version, like those before it had some flaws which meant that smaller estates could end up paying a higher percentage due to the legacy and succession duties that were still payable under the system. In comparison to larger estates where testators (the deceased) were passing the majority of their wealth through legacies and bequests that were duty-free.
To rectify this unfairness in the Estate duty system, Stafford Cripps a British labour politician, abolished legacy, and succession duties in the finance act 1949. It also extended the three-year period for gifts prior to death to 5 years. Which was further increased to the 7 years that we still have today in the finance act 1969.
Even with the extensions made to the gifts prior to death Estate duty was criticised for not fully capturing the value of these gifts and the value of properties that were vested in trusts. This was addressed by Denis Healy the Chancellor of the exchequer at the time saying, “Nothing is more offensive to the vast majority of ordinary taxpayers, most of whom are subject to PAYE, than the knowledge that people far better off than themselves are avoiding taxation by exploiting loopholes in the existing law.”
The finance act 1975 abolished estate duty and replaced it with Capital Transfer Tax which accounted for taxation on transfers of wealth that were not being captured previously by wealthier individuals that were exploiting loopholes in the previous law. Capital transfer tax included a sliding scale for transfers made during a person’s lifetime that weren’t otherwise exempt.
The scope of Capital Transfer tax was affecting British businesses and was reduced during the thatcher years. However, it wasn’t until 1986 that Nigel Lawson moved to remove the tax on lifetime gifts completely saying that the effect it had was a detriment to the businesses concerned. His proposal with implemented in the Finance Act 1986 and Capital Transfer tax was rebranded as Inheritance Tax.
There was no major change to Inheritance tax until 2007 when the chancellor unveiled proposals to increase the non-taxable amount of an estate to £325,000 rather than increasing it in line with inflation as it had been done previously. With this change also came the ability to transfer a previously deceased’s spouses unused nil-rate band upon the second death allowing for a potential £650,000 non-taxable allowance. This was implemented in the finance Act 2008 and is part of the system still currently used.
The most recent change came in April 2016 when a main residence allowance was introduced which allowed people an additional non-taxable £100,000 on a main residence that is being passed to direct descendants this increases an individual’s non-taxable estate to a potential £450,000. One of the reasons for this change was to try and account for the rising cost of property, particularly in south-east England.