News / Inheritance Tax

Will Inheritance Tax be scrapped?

Inheritance Tax has been used as something of a pawn by many political parties over the years. Recent media reports, citing sources close to Downing Street, have suggested that, ahead of the next general election, the Conservative Party is now considering proposals to scrap Inheritance Tax. Peter Webb, our Head of Tax Advisory, explores the likelihood of Inheritance Tax being removed from the UK system.

What is Inheritance Tax?

Inheritance Tax is, generally, a tax on the Estate (the property, money and possessions) of someone who’s died. The headline rate of Inheritance Tax is 40%, and it applies to wealth that’s already likely to have suffered tax and National Insurance – both when that income was originally earned and then invested. Although Inheritance Tax (IHT) makes headlines, it’s worth remembering that allowances do mean a married couple or civil partners can shelter up to £1m from IHT, with only 1 in 20 Estates currently facing a charge.

How much does the government collect in Inheritance Tax?

Last year around £786.6bn was collected in UK tax, with IHT contributing just over £7bn. Income Tax raised £249bn and National Insurance contributions brought in £178bn (Source: www.gov.uk).

In context, IHT raises just a fraction (less than 1%) of the taxes collected each year.

Why would the government consider scrapping Inheritance Tax?

IHT is frequently accused of being unfair. As well as being further tax on income and gains that have already been taxed, it’s often perceived to be disproportionately applied to the wealthy, resulting in them paying less as a proportion of their Estates compared to others.

Paul Johnson, the director of the Institute for Fiscal Studies (IFS), has publicly called for a reform of IHT, tweeting: “It is genuinely unfair. The very wealthy pay an average rate half or less (than) that paid by the moderately wealthy. If all you leave is the family house it’s hard to avoid. If you have millions it is absurdly easy to avoid.”

With only 1 in 20 Estates likely to pay IHT, and given its small contribution to government finances, it’s easy to understand why the Conservatives are considering abolition. Against the backdrop of next year’s general election, changes to IHT could deliver a strong pledge to voters.

When could Inheritance Tax be scrapped?

Earlier this year Rishi Sunak set out the government’s priorities for 2023; halving inflation, growing the economy and reducing government debt. But in May 2023 government debt reached £2.6trillion, more than 100% of annual national income for the first time since 1961. With inflation stubbornly high and little in the way of economic growth it’s hard to see a situation where any taxes could be reduced in the coming months. And although tax cuts (or the promise of them) always dominate the headlines, it remains to be seen whether the government has the appetite to consider a manifesto pledge of this nature.

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