Scrapping Inheritance Tax

Scrapping Inheritance Tax

The government is reportedly holding talks about abolishing inheritance tax (IHT) as part of its manifesto pledge in an attempt to win over votes in the next general election. This is being considered as a manifesto pledge, rather than a policy to be implemented next year.

This latest discussion of IHT comes after a recent campaign by more than 50 Conservative MPs have called for it to be abolished. They feel that abolishing IHT before the next general election would show that the government supports families in their wishes to pass on their hard-earned savings to the next generation.

Some have argued abolishing IHT during a cost of living crisis should not be a government priority, while experts have suggested an overhaul of IHT would be the more sensible option.

A Treasury spokesperson has stated that the vast majority of estates do not pay inheritance tax – more than 93% of estates are forecast to have zero inheritance tax liability in the coming years. However, the tax still raises more than £7bn a year to help fund public services. If IHT is abolished the government have not declared how or where they would intend to raise this money from instead.

Many perceive IHT to be a ‘wealth tax’ but IHT applies to estates worth more than £325,000, and is charged on the portion that is above that threshold. Because the value of property makes up a significant value of an individual’s estate, this is a bigger issue in London and the south east. Although estates of spouses and civil partners may be able to pass on up to £1m without any inheritance tax liability by transferring the nil rate band (NRB) and the residence nil rate band (RNRB) if applicable. It was announced in the Autumn budget that these IHT allowances will remain the same until at least 2028, which will inevitably bring more estates into scope for IHT given the likelihood of house price increases by that time.

IHT is a notoriously unpopular tax. Many people feel that by paying IHT, they are being taxed twice on the same assets. There is a general feeling that people should be able to pass on assets to whoever they wish particularly when they have usually already paid tax on earning the money and also on investing it. People generally feel that you should be able to pass the family home on to your descendants. At 40% IHT is also one of the highest rates of tax thus significantly reducing the value of the estate left for its beneficiaries.


There are a few options available to the government to try to make this more palatable given the unpopularity of this tax:-

  1. Raise the thresholds for IHT

This could be seen as bringing this into line with inflation and would reduce the number of estates to which IHT would apply. This would potentially give relief to middle class families, whilst still taxing the very rich. Another possibility would be to scrap the residence nil rate band altogether but increase the nil rate band.

  1. Lower the tax percentage

This would result in a reduction in tax revenue for public services and may not be as popular an option, as the tax would still fall due on the same number of estates. A possible solution could be to bring in a tiered percentage rate system, in the same way as for stamp duty tax for example, but this may cause complexity.

  1. Abolish IHT altogether

This would be the most popular option for those who would pay inheritance tax under the current rules, and would also satisfy those that consider the tax to be unfair generally. The obvious problem is lost tax revenue, which would need to come from elsewhere. Abolishing the tax for the wealthiest in society could, however, have the effect of boosting the economy. Its abolishment would also reduce the administrative burden and resulting expense at HMRC.

It remains to be seen what changes on this issue the government will pledge to make, if any….