The hidden flaws in a ‘death tax’ to pay for a national care service

HMRC has uncovered £1.36 billion in unpaid inheritance tax over the past five years, according to figures obtained by the NFU Mutual through a Freedom of Information request. These revelations have intensified concerns about a potential new “death tax,” as political leaders consider ways to fund an ambitious National Care Service. The latest data shows that the total inheritance tax collected reached a record of nearly £8.5 billion in the last tax year. However, the introduction of Andy Burnham as Prime Minister has sparked discussions about overhauling the current system, which could affect more estates. Investigations into underpaid inheritance tax have yielded £247 million in the 2024-25 fiscal year, marking a 13 percent decline compared to the previous year. Sean McCann, a chartered financial planner at NFU, explained that this drop does not signal a shift in strategy by HMRC. He emphasized that investigations often span months or even years, suggesting that the £247 million could result from inquiries initiated earlier. McCann highlighted that HMRC uses a variety of methods to scrutinize estates, including examining bank statements, life insurance policies, and other insurance records. These tools help identify discrepancies or undervalued assets, leading to increased assessments and additional charges. The current inheritance tax applies to approximately 4 percent of estates, with a 40 percent rate on assets exceeding a specific threshold. For individuals, the threshold stands at £325,000, while couples can benefit from a joint threshold of £650,000. If the home is passed to direct descendants, the thresholds increase further. Heather Rogers, a tax expert from This is Money, cautioned against incorrect valuations, noting that HMRC may intervene if disputes arise. She recommended professional valuations, especially for properties intended for beneficiaries, to avoid complications during the inheritance tax process. Andy Burnham has expressed support for a 10 percent “death tax” on all estates to finance the National Care Service, a concept critics label as a “death tax.” This proposal aims to replace the existing 40 percent inheritance tax rate, affecting a broader range of estates. Experts warn that this change could be revenue-neutral at best, failing to generate sufficient funds for the estimated £18.5 billion required for the National Care Service. Stuart Adam, a tax expert at the Institute for Fiscal Studies, calculated that a 10 percent levy might yield around £9 billion annually, significantly lower than the projected needs. He also noted that behavioral responses, such as transferring assets to avoid the tax, could reduce actual revenues. Burnham’s stance on tax increases has prompted speculation about future legislative actions. During a speech, he acknowledged the necessity of difficult decisions regarding social care funding, emphasizing the need for honesty with the public. He accelerated Louise Casey’s review of social care, aiming for a report by next year. Additionally, he pledged to explore improvements in social care worker pay and facilitate cross-party discussions on reforms. Despite these efforts, Burnham maintained that initial steps could be taken using existing budgets, deferring more contentious tax hikes to a later stage. The ongoing debate surrounding inheritance tax and its potential transformation reflects broader challenges in balancing fiscal responsibility with social welfare. As HMRC continues its investigations and Burnham outlines his vision for social care reform, the implications for taxpayers and the government remain uncertain. The coming months will likely witness further developments as policymakers navigate the complexities of funding a comprehensive care system.