Taxing times…

Understanding the various forms of taxation is essential for business students worldwide. Taxes serve not only as a major source of revenue for governments but also play a critical role in shaping economic policies and social structures. This article provides an overview of the major types of taxes, followed by a detailed examination of recent trends in UK inheritance tax, offering insight into its implications and the broader socio-economic impacts.

Overview of Tax Types

Income Tax

Income tax is charged on individual earnings, encompassing wages, salaries, and other forms of income. Typically, this tax is progressive, meaning the tax rate increases as the individual’s income grows. This system aims to ensure fairness, with higher earners contributing a greater proportion of their income towards national and local services.

Corporation Tax

This tax is levied on the profits generated by businesses. The rationale behind corporation tax is to collect revenue from the success of firms, which can be reinvested into society. Rates and rules vary significantly across different jurisdictions, reflecting local economic policies and business environments.

Value-Added Tax (VAT)

VAT is a consumption tax applied to the value added to goods and services at each stage of production or distribution. It is ultimately paid by the end consumer and is included in the price of products. The standard rates can differ, with some goods and services often exempt or subjected to reduced rates to encourage consumption or support social policies.

Inheritance Tax

Inheritance tax is imposed on the estate of a deceased person. This tax affects only a portion of estates, typically those exceeding a specific threshold value, which is determined by each jurisdiction. The tax is intended to balance wealth distribution and raise revenue without impacting the deceased’s financial decisions during their lifetime.

In-Depth: UK Inheritance Tax Issues

In 2023, the UK saw inheritance tax receipts surge to a record £7.5 billion, which was £400 million more than the previous year and marked the highest inheritance tax take ever according to HM Revenue & Customs. This increase came despite expectations of tax reform, which ultimately did not materialize.

The inheritance tax in the UK is particularly notable because of the threshold for when the tax applies — set at more than £325,000 — has not been adjusted since 2009. With property values significantly increasing, more estates now exceed this threshold, leading to a greater number of families becoming liable for the tax at a standard rate of 40%. This situation exemplifies ‘fiscal drag’, where tax thresholds lag behind inflation, inadvertently widening the tax net.

Regions like London and the South East in the UK have been disproportionately affected due to the rapid appreciation of property values but other areas which have historically had lower average house prices such as the Northeast and the Midlands have seen house values increase recently so that these assets now fall above the inheritance tax threshold. The unchanged threshold and rising asset values have pushed the effective tax burden onto middle-class families, transforming what was once considered a levy on the very wealthy into a more widespread tax.

Economic forecasts suggest that if the status quo remains, inheritance tax could generate nearly £10 billion annually by 2030. However, despite the increasing revenues, only about 4% of the population is currently impacted, a figure that is expected to nearly double over the next decade.

Critics, including Alastair Black, head of savings policy at abrdn, argue that the tax is affecting “more and more people than it was ever intended to capture.” This has sparked debate over the need for reform to realign the tax with its original purpose, especially as it becomes a significant point of contention in political discussions and upcoming elections.

Conclusion

For business students, a thorough understanding of tax principles is crucial. Taxes like inheritance tax not only reflect fiscal strategies but also embody broader societal values and government priorities. As future leaders, students must navigate and potentially reform these complex and impactful systems, shaping how societies fund themselves and distribute economic benefits.