When Did Inheritance Tax Start? A History of IHT in the UK and What It Means for You Today

Inheritance tax (IHT) is one of the UK’s most controversial taxes - often described as a “death tax” that unfairly penalises families trying to pass on wealth to the next generation.

But to understand how we got here, it’s worth asking:

“When did inheritance tax start?”

The answer is older than you might think. Inheritance tax, in one form or another, has existed in Britain for over two centuries, though the way it works has changed dramatically.

In this article, Belgravia Capital Wealth Management takes you through the history of inheritance tax in the UK, how it has evolved over time, and what its origins reveal about its future and your planning.

The Origins of IHT: Legacy Duty in 1796

The earliest form of inheritance taxation in the UK began with the introduction of Legacy Duty in 1796.

It was brought in during the wars against Revolutionary France to raise funds for the British government. Legacy Duty applied to personal property left in a will and was:

• Charged on legacies passed to beneficiaries (not on the estate itself)

• Calculated based on the relationship between the deceased and the beneficiary (the closer the relation, the lower the duty)

• Payable on cash, goods, and other personal effects - not land

This duty marked the first official recognition of the state’s interest in wealth transfers at death.

Succession Duty Introduced in 1853

Legacy Duty was supplemented by Succession Duty in 1853, introduced by then-Chancellor William Gladstone.

This new tax:

• Applied to real estate and land - previously untaxed

• Was also based on the beneficiary’s relationship to the deceased

• Imposed an annual tax on the income value of inherited assets

Succession Duty was a significant expansion of inheritance taxation, reflecting a growing view that landowners and the wealthy should contribute more to public revenue.

Estate Duty: The Foundation of Modern Inheritance Tax (1894)

In 1894, the system was overhauled with the introduction of Estate Duty by Sir William Harcourt, the Chancellor of the Exchequer in the Liberal government.

This was a landmark moment in UK tax history:

• For the first time, the whole estate - not just individual legacies - was taxed

• The tax was progressive, with rates increasing as the estate value rose

• It marked a philosophical shift: the state claimed a right to tax the estate as a whole, not just the inheritance

Estate Duty replaced many of the earlier duties and formed the core of what we now recognise as inheritance tax.

Gift Duty and Capital Transfer Tax (20th Century Developments)

Gift Duty (Introduced 1939)

• Aimed at stopping people from giving away assets during their lifetime to avoid Estate Duty

• Imposed tax on gifts made shortly before death

Capital Transfer Tax (CTT) — 1975

• Introduced by the Labour government to replace Estate Duty

• Taxed lifetime transfers and transfers on death

• Removed the concept of taxing only at death and aimed to tax wealth transfers more comprehensively

CTT was controversial and complex, and its reach into lifetime giving was deeply unpopular among middle- and upper-income families.

Inheritance Tax Introduced in 1986

In 1986, the Conservative government under Margaret Thatcher replaced Capital Transfer Tax with a simplified system: Inheritance Tax.

Key features of IHT as introduced in 1986:

• 40% flat rate on estates above the nil-rate band

• Lifetime gifts were generally tax-free if the donor survived seven years

• Exemptions were introduced for gifts to spouses, charities, and small gifts

• Agricultural and Business Property Reliefs were introduced or strengthened to protect business owners and farmers

This structure has remained largely intact - and forms the basis of today’s inheritance tax system.

Modern Additions: Residence Nil-Rate Band and Trust Regulation

Since 1986, inheritance tax has evolved in response to political and economic changes.

Residence Nil-Rate Band (2017)

• Added a further £175,000 allowance for passing on the family home to direct descendants

• Created the potential for married couples to pass on £1 million tax-free

Trust Reform (2006 onward)

• Lifetime trusts became subject to new charges and reporting

• The government cracked down on IHT avoidance through complex trust structures

These additions have made IHT more complex - and the rules around qualifying reliefs, exemptions, and gifting are now highly technical.

Where Are We Now? The 2024 Labour Reforms

In its 2024 Autumn Budget, the new Labour government announced the most significant changes to IHT since 1986:

• Capped Business and Agricultural Relief at £1 million per person

• Reduced relief for AIM shares

• Included pension wealth in IHT from 2027

• Extended frozen allowances until 2030

These reforms reflect a shift back to a more redistributive, revenue-focused approach - echoing the earlier philosophical basis of Estate Duty and CTT.

What Does the History of Inheritance Tax Tell Us About Its Future?

Inheritance tax has always been more than just a revenue tool - it reflects the political climate, economic pressures, and changing views on fairness and intergenerational wealth.

What the past suggests:

• Rates and thresholds change with government ideology

• Lifetime giving is increasingly scrutinised

• Reliefs can be introduced or withdrawn rapidly

• Taxation is unlikely to disappear, only evolve

For families with significant estates, the lesson is clear: rules can change, but planning opportunities exist in every system.

How Belgravia Capital Wealth Management Can Help you Avoid Inheritance Tax on your Estate

We help families plan for the future by understanding the past and anticipating what’s next.

Our services include:

• IHT exposure reviews and estate forecasting

• Trust planning based on current and expected legislation

• Lifetime gifting strategies

• Protection against future liabilities through insurance

• Reviews of wills, pensions, and succession plans

We provide bespoke advice to help you build a resilient estate plan that evolves with the tax system.

Conclusion: When Did Inheritance Tax Start?

Inheritance tax has existed in some form since 1796, but the structure we know today has developed through over two centuries of reform, ideology, and economic need.

The one thing that hasn’t changed? The importance of planning.

Whether the system becomes more punitive or simply more complex, families who plan early are always in a stronger position.

Contact us today at contact@belgravia-capital.co.uk for personalised inheritance tax advice built to last - no matter how the rules change.