History of UK Death Taxes: Estate Duty, CTT, and the 40% IHT Rate
The UK has taxed inherited wealth since 1894. Rates have changed dramatically — from 80% under Estate Duty to the current flat 40%, set by the Finance Act 1988 and unchanged since.
Five Eras of UK Inheritance Taxation
Estate Duty (1894–1975)
Progressive scale from 1% to 80%Introduced by the Finance Act 1894. Applied to property passing on death. Progressive rates rose steeply — by the 1970s the top rate reached 80% on estates over £2 million. Many large estates paid devastating amounts, leading to the sale of country houses, art collections, and businesses.
Capital Transfer Tax (1975–1986)
Lifetime and death tax, up to 75%Finance Act 1975. CTT replaced Estate Duty and — crucially — extended the tax to lifetime gifts as well as death transfers. This closed the simple 'give it away to avoid the duty' planning. Rates were progressive with the top rate reaching 75% on large cumulative transfers. Gifts to spouses were not fully exempt.
Inheritance Tax (1986–1988)
Progressive scale, top rate 60%Finance Act 1986 renamed CTT as IHT and introduced the potentially exempt transfer (PET) — a gift that escapes tax if the donor survives 7 years. Business property relief and agricultural property relief were also rationalised. The top rate was initially 60% on a sliding scale.
IHT after Finance Act 1988 (1988–present)
Flat 40% above nil-rate bandFinance Act 1988 reformed IHT to a flat 40% rate above the nil-rate band, replacing the previous sliding scale. This is the rate that has applied ever since. Transfers to spouses became fully exempt. The nil-rate band (£325,000 since 2009) and the 40% flat rate remain the core of the IHT system.
Charitable 36% rate (2012–present)
36% where 10%+ of net estate left to charityFinance Act 2012. Where 10% or more of the net estate (above the NRB) is left to qualifying charities, the IHT rate on the chargeable estate drops from 40% to 36%. Introduced to incentivise charitable legacies in wills.
Frequently Asked Questions
What was Estate Duty and how did it differ from modern IHT?
Estate Duty was the predecessor of modern inheritance tax, introduced by the Finance Act 1894. It applied to property passing on death — both property held outright and property over which the deceased had a general power of appointment. Estate Duty had a progressive rate structure that rose steeply with the value of the estate, reaching 80% on the largest estates by the early 1970s. It differed from modern IHT in several key ways: (1) it applied only to transfers on death, not to lifetime gifts (until the very end of its life); (2) there was no spouse exemption — a surviving spouse inherited subject to estate duty; (3) avoidance of estate duty through lifetime gifts was relatively straightforward for those who could afford to give assets away early enough. The absence of a lifetime gifts charge (and the general absence of a spouse exemption) meant that estate duty planning was very different from modern IHT planning.
What was Capital Transfer Tax and why was it introduced?
Capital Transfer Tax (CTT) was introduced by the Finance Act 1975 and replaced Estate Duty from 13 March 1975. The key innovation of CTT was that it taxed lifetime gifts as well as death transfers — on a cumulative basis. This closed the main Estate Duty avoidance technique of giving property away during life. Rates were progressive (rising with cumulative lifetime and death transfers) and eventually reached 75% on transfers above a threshold of several hundred thousand pounds. CTT also introduced the unlimited spouse exemption for lifetime transfers to a UK-domiciled spouse, though the spouse exemption on death was limited. CTT existed from 1975 to 1986, when the Finance Act 1986 renamed it Inheritance Tax and introduced the PET regime.
What changed when IHT replaced CTT in 1986?
The Finance Act 1986 renamed Capital Transfer Tax as Inheritance Tax and made three fundamental changes: (1) The potentially exempt transfer (PET): lifetime gifts to individuals (and certain trusts) became potentially exempt — if the donor survived 7 years, no IHT was payable. This revived the ability to give assets away during life to avoid death tax. (2) Business and agricultural property relief were rationalised and made more generous. (3) Gifts to a UK-domiciled spouse were made fully exempt on death (completing what CTT had started for lifetime transfers). The rate structure in 1986 was still a sliding scale with a top rate of 60%, but Finance Act 1988 then simplified this to the flat 40% rate that applies today.
When was the IHT rate set at 40% and has it ever changed?
The flat 40% rate above the nil-rate band was introduced by the Finance Act 1988, applying to deaths on or after 15 March 1988. Before this, there was a progressive sliding scale — the immediate predecessor rates were: 30% on the first £90,000 above the then NRB; 35% on the next £10,000; rising in steps to 60% at the top. The Finance Act 1988 abolished the sliding scale and set a single flat rate of 40%. This rate has not changed since 1988 — now 37 years ago. The only modification has been the reduced 36% rate for estates that leave 10% or more to charity, introduced by Finance Act 2012. In real terms, the effective IHT burden has increased substantially since 1988 due to rising property values and the frozen nil-rate band.
What is the 36% IHT rate and how does it work?
Since the Finance Act 2012 (for deaths on or after 6 April 2012), the IHT rate drops from 40% to 36% where 10% or more of the baseline amount (broadly, the net estate above the nil-rate band) is left to qualifying charities. The charity must be established in the UK or another qualifying country. The 4% reduction in IHT may, in many estates, mean that the net cost of the charitable legacy is less than its face value — i.e. the estate 'gives' to charity partly at the government's expense via the reduced IHT. The calculation uses a 'merged' or 'opt-in' approach where different components of the estate (survivorship, settled property, general estate) can be merged for the calculation to maximise the benefit. A deed of variation can be used to redirect a legacy to charity after death in order to qualify for the 36% rate.
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