Inheritances are set to become much larger – relative to their receivers’ overall incomes – in the coming decades. Arun Advani and David Sturrock consider what this means for social mobility. They argue that the current inheritance tax regime does little to reduce the transmission of wealth gaps (between the rich and the poor) from one generation to the next.

Inheritance tax is arguably one of the more unpopular taxes in the UK. It certainly elicits strong feelings. That partly explains the speculation that the tax might be cut in last November’s Autumn Statement, potentially alongside a pledge to abolish it in the future. While the Chancellor did not make any changes at that fiscal event, this policy may return as a Budget or election issue.

Beyond the political headlines, there is good reason for an increasing focus on inheritance tax. Since the late-1970s, household wealth has grown rapidly, and much more quickly than incomes. Consequently, inheritances now make up a larger share of national income, rising from under 5 per cent of GDP in the late 1970s to over 8 per cent in the mid-2000s.

Inheritances are getting more important

Inheritances are set to become even more important in the coming decades – for three reasons.

First, those generations reaching the end of their lives in the coming decades are much wealthier than those who went before them. For example, those born in the 1940s had about 30 per cent more wealth, on average, than those born in the 1930s, when they were at a comparable age. The former can therefore be expected to bequeath much larger sums than the latter. Second, subsequent generations have had fewer children, meaning their estates will be split between fewer people, who each get more. Third, the sluggish performance of wage growth in recent times means that today’s inheritors do not typically have substantially larger incomes than their predecessors. As a consequence, inheritances are expected to be twice as large, relative to receivers’ other lifetime income, for those born in the 1980s compared to those born in the 1960s.

This matters for two reasons. The first is that as inheritances grow, so will the revenues from inheritance tax, at least as it is currently designed. In analysis published in September last year, we estimated that inheritance tax revenues will double in real terms by 2032-33, rising from around 0.3 per cent of GDP to around 0.5 per cent. While remaining a small tax, as revenues grow, the imperative to have a well-designed inheritance tax will increase, too. In that regard, eliminating the various reliefs and exemptions that make inheritance tax easy for some to avoid would be welcome.

The second reason is that as inheritances become a larger part of people’s lifetime resources, they matter more for inequalities by parental background. Those with the least-wealthy fifth of parents – whether born in the 1960s, 1970s or 1980s – can expect to inherit very little, if anything. By contrast, those with parents further up in the wealth distribution are set to inherit substantial sums and amounts that are growing across generations. IFS research has estimated that someone born in the 1960s and in the top fifth by parental wealth can expect to inherit one pound for every six that they receive in other income over their lifetime; for someone born in the 1980s, the corresponding figure rises to two pounds for every six pounds of lifetime income. Inheritances are therefore set to play a key role in reducing social mobility, by expanding the difference in resources between those with wealthy versus less-wealthy parents, and doing this more strongly for later-born generations.

In principle, inheritance tax should improve social mobility

One of the main justifications for having an inheritance tax at all is to reduce the extent to which wealth differences pass from one generation to the next. Inheritance taxation is held up as an important policy for any government committed to increasing social mobility and decreasing the gaps between those from different family backgrounds.

While inheritance tax does take more from larger estates, under the current system, its role in redistributing wealth is modest. The reason for this is the same reason that inheritance tax doesn’t raise much revenue: only a few pay it. Currently, most couples can leave up to £1 million before paying any inheritance tax at all. Consequently, only around 5½ per cent of those who die have any inheritance tax paid on their estate. And while the tax rate for inheritances above this tax-free threshold is 40 per cent, numerous exemptions and reliefs – including for agricultural land, business assets, some types of shares, gifts and pensions, to name a few – mean that even among those who do pay, the actual rate is far lower than this headline rate.

In practice, inheritance tax is too little, too late

Inheritance tax is therefore rather small in the context of inherited wealth. Figure 1 provides an illustration of this. Those with parents in the wealthiest fifth to die this year will inherit, on average, £380,000. But only around £40,000 in inheritance tax will be paid on that inheritance. At the same time, those with the poorest fifth of parents will inherit almost nothing. Inheritance tax only reduces the gap in what is received by those two groups by about a tenth.

Figure 1: Net inheritance and inheritance tax paid on inheritance, and mean “child wealth” for individuals aged 50–54, by wealth quintile of parents, in 2024–25

Notes: In this figure “child wealth” refers to the wealth of adult children, aged 50-54, split into groups based on the wealth of their parents. Source: Advani and Sturrock (2023) Figure 7.12.

What’s more, these inheritances come on top of striking wealth inequalities that are built up before any inheritances are received. Figure 1 shows that someone in their early 50s (just before inheritances are typically received) with parents in the wealthiest fifth has, on average, personal wealth of over £800,000. This compares to less than £200,000 for someone with the poorest fifth of parents.

Reforms that improve social mobility are possible

This is not to say that a reformed inheritance tax couldn’t make a difference to wealth inequalities and social mobility.

The inheritance tax regime could be expanded dramatically to cover many more taxpayers than are currently affected, with fewer exemptions and allowances granted – putting it in line with previous regimes which had much higher marginal rates. For example, our research shows that implementing a schedule similar to the 1985-86 “Capital transfer tax” would increase the tax rate on the inheritances received from the wealthiest fifth of parents to around 43 per cent, far higher than the actual rate paid by this group today.

The other crucial design choice, when it comes to supporting social mobility, relates to the fact that inheritances arrive late (and increasingly late) in life. By then, as Figure 1 makes clear, substantial wealth inequalities have already been established. Debates around wealth inequalities and the role of parental assistance therefore often turn to the role of the “Bank of Mum and Dad” in helping with key life events like buying a home, paying for higher education or getting a good start in the labour market. The effects are visible in pre-inheritance wealth differences. Although much smaller than inheritances, at around a fifth of their value each year, lifetime gifts can have outsized impacts because they come at crucial points in a recipient’s life, for those lucky enough to receive them. Almost all of these gifts are outside of the scope of inheritance tax, since they are typically made more than seven years before death – the usual limit for gifts to be included in inheritance tax. For those concerned with social mobility, it is important to look much earlier in life than parental death.

All articles posted on this blog give the views of the author(s). They do not represent the position of LSE Inequalities, nor of the London School of Economics and Political Science.

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