Prime Minister Rishi Sunak is said to be exploring widespread reforms to inheritance tax (IHT) in a bid to shore up voter support ahead of next year’s general election.
Some of the ideas include cutting the 40% headline rate and scrapping IHT altogether.
The final decision lies with the Chancellor of the Exchequer Jeremy Hunt, who’s unlikely to announce any concrete regime changes until 2024. But here’s how some of the suggested changes could affect you.
IHT is complicated and this article isn’t personal advice. We can advise you on how to make use of tax allowances but if you need complex tax calculations, we recommend consulting an accountant or tax specialist.
How does IHT work now?
IHT is normally paid at 40% on the value of your estate (property, money and possessions) that’s over the nil-rate band allowance of £325,000.
There’s also an extra allowance of up to £175,000 if you pass on your family home to your direct descendants (children or grandchildren). This is known as the residence nil-rate band and it will be reduced on a proportionate basis for estates worth more than £2,000,000. For any joint assets, you only include the value of your share of the estate.
40% sounds like a lot, but there are some useful ways to reduce your potential IHT bill. For example, you can gift through your annual exemptions, for weddings, donate to charities or political parties and even gift out of surplus income.
To find out more, read our essential guide to Inheritance Tax.
How much IHT are we paying?
While less than 4% of estates in the UK currently pay IHT, it raised £5.7bn in relation to deaths in the 2020-2021 tax year.
The amount of IHT paid varies from region to region.
Estates in London, subject to IHT, paid the highest average bill in relation to deaths in the 2020-2021 tax year, at £279,167. Meanwhile, IHT-liable estates in Northern Ireland had the lowest average bill of £136,213.
| Region | Number of taxable estates | Average bill (£) |
|---|---|---|
| England | 22,200 | 213,964 |
| North East | 467 | 141,328 |
| North West | 1,700 | 165,294 |
| Yorkshire and the Humber | 1,160 | 183,621 |
| East Midlands | 1,210 | 177,686 |
| West Midlands | 1,630 | 179,141 |
| East of England | 2,880 | 192,014 |
| London | 4,800 | 279,167 |
| South East | 5,650 | 224,779 |
| South West | 2,700 | 189,259 |
| Wales | 790 | 146,835 |
| Scotland | 1,340 | 186,567 |
| Northern Ireland | 301 | 136,213 |
Source: HMRC, July 2023.
To find out how much IHT you could pay, use our inheritance tax calculator.
The future of IHT
The exact changes being considered by Downing Street aren’t public yet. However, there have been calls for certain exemptions and reliefs to be scrapped. For example, the exemption of most pension pots from IHT, the residence nil-rate band, and reliefs for agricultural and business assets.
While this could mean more estates paying IHT, it could lead the way to a lower headline rate.
Abolishing IHT altogether is likely to divide opinion – it is, after all, a highly emotive tax. But there are warnings that scrapping it would dent the Treasury’s future revenue from the tax.
The Institute for Fiscal Studies estimates that, if the current system isn’t changed, IHT receipts will increase to just over £15bn by 2032-33.
Given the state of the economy, we think it’s unlikely the government will make major changes to IHT without the lost revenue being replaced elsewhere.
A more meaningful way forward could be to increase tax-free IHT thresholds and gifting allowances, some of which have been frozen for well over a decade.
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Article image credit: Future Publishing/Getty Images.