UK wealth taxes explained
Please be advised that the information in this article regarding QNUPS and IHT is no longer accurate due to the recent changes announced in the UK Budget. Starting in April 2025, the regulations will have significant implications that may affect your understanding of these topics. We encourage you to stay informed and consult with a Soteria Trusts expert to navigate these changes effectively.
UK wealth taxes are taxes levied on the value of an individual’s assets. This includes property, savings, and investments. They are designed to prevent large concentrations of wealth from being passed down through generations, but also to fund public services such as healthcare and education. These taxes can be controversial because it can be difficult to value assets accurately, and the taxes can disproportionately impact those with lower incomes. However, supporters argue that they are necessary in order to ensure that the tax system is fair and progressive.
What are wealth taxes and how do they work in the UK
Wealth taxes are taxes imposed on individuals based on the value of their assets, and their rates are higher for wealthier individuals. Some of the ways the UK Government is taxing wealth are:
- Council Tax is a tax levied by local authorities on property owners
- Inheritance Tax is levied on the estate of a deceased person
- Stamp Duty Land Tax is a tax on the purchase of property
- Capital Gains Tax – levied on the proceeds of a sale of assets and on gifts
Related: Stamp Duty Land Tax Rates
Who has to pay wealth taxes in the UK
In the UK, wealth taxes are paid by individuals who have a certain level of wealth. The amount of tax you must pay depends on your overall estate’s value, and the tax rates vary depending on your circumstances. Most of the time, property is the largest asset forming people’s estates.
Related: Are UK property taxes high?
Wealth taxes are also paid by companies and trusts, although the rules for these are different. If you’re not sure whether you have to pay wealth tax, you can contact HMRC for more information.
How much money do you have to make before you start paying wealth taxes in the UK
Inheritance tax, which is the main UK wealth tax, is levied on individuals who own assets above a certain value, not necessarily on how much they earn. In the UK, inheritance tax is payable on assets worth more than £325,000 following the death of a single person, or £650,000 per married couple, at a rate of 40% of the assets value above the thresholds.
How is the value of your assets assessed for wealth tax purposes in the UK
The taxable estate includes property, savings, investments, and possessions such as cars, jewellery and works of art. The tax is payable on the value of an individual’s estate when they die, as well as on any gifts made during their lifetime (there are specific rules on that matter, more information below).
In the UK, the rate of inheritance tax is currently 40%. This means that for every £1 million in assets an individual has above £325,000, the family who inherits their wealth must pay £400,000 inheritance tax in order to be able to access the deceased estate.
What happens if you don’t pay your wealth taxes in the UK
Wealth taxes are a contentious issue, with some arguing that they are unfair to those who have accumulated their wealth through hard work and enterprise. In fact, inheritance tax bills are the number one reason for selling assets in the UK. This is because one must pay the inheritance tax bill before they can access the deceased’s estate.
Related: What happens if I don’t pay IHT?
In many cases, as mentioned earlier, the greatest value of one’s estate is property. Property prices in the UK have gone up significantly, and many families are being caught in the inheritance tax web, where the estate exceeds the tax-free threshold because their home increased in value. The increase in value makes them ‘asset rich, cash poor’ and leaves them in a position where they are unable to pay the inheritance tax that will become due.
Are there any exemptions from wealth taxes in the UK
There aren’t necessarily any exemptions, but there are HMRC-approved ways people can minimize their inheritance tax. Ways to reduce the inheritance tax can include:
- Passing your home (main residence) to a direct descendant;
- Making gifts during your lifetime (Gifts of up to £3,000 to each family members and £250 to as many other people as you want to, in each tax year, are exempt from Inheritance Tax, but you must live for 7 years after the gift has been given);
- You can enjoy a reduced 36% IHT rate if you leave 10% of your estate to a charity;
- Opening an inheritance tax free overseas pension (QNUPS)
You can learn in more detail about legal ways to minimize UK wealth taxes in our complimentary guide.
