As taxation goes, one stands out as more contentious than others: Inheritance Tax (IHT). In fact, a survey from This is Money reveals that 24% of people call IHT their “most hated tax”. 

In recent years, the Treasury’s IHT take has been on the rise, partly due to frozen thresholds and soaring property values. The government even reports that IHT receipts in June 2023 represented the highest monthly total on record.

In June 2023, more than 50 Conservative MPs launched a campaign to abolish IHT, with the former chancellor, Nadhim Zahawi, even writing an article in the Telegraph calling it “morally wrong”.

Continue reading to discover the arguments for and against scrapping the tax, and how the abolition of IHT could affect you and your estate. 

Higher property values and a rising cost of living have contributed to an increased IHT take

Even though the standard rate of IHT has remained at 40% since 1986, the amount of money taken by the Treasury through the tax has increased in recent years. 

Indeed, the government website states that IHT receipts between April and June 2023 were £2 billion, £200 million higher than a year prior. 

The government has frozen the nil-rate band, which is the £325,000 threshold before IHT becomes payable, since 2009, and this will remain until April 2028. 

The additional “residence nil-rate band” of £175,000 that you can use if you pass your home to a direct descendant has also been frozen until 2028.

Despite these freezes, This is Money reveals that the average UK house price rose by 73% between January 2013 and January 2023, from £167,716 to £290,000. With higher property prices, more of your wealth may exceed the nil-rate bands, and you could pay more IHT. This is known as “fiscal drag”.

So, even though you may believe that many would be clamouring to end the tax, there are some arguments for and against its abolition – read on to discover these benefits and downsides. 

IHT was initially meant to target the super-wealthy, but more and more are facing IHT receipts

The reason you may dislike IHT so much could be that you believe you should be able to pass on your hard-earned assets to future generations without them paying tax on this wealth. 

If the Conservatives decided to abolish IHT, this could, in theory, help further wealth creation, which may benefit the economy since people will have more money to spend. 

It’s important to remember that IHT was initially introduced to tax the super-wealthy. Though, with property prices on the rise, thresholds frozen, and inflation still high, more and more estates are becoming liable to pay IHT, which is why it’s often referred to as a “stealth tax”. 

Also, some experts have stated that IHT doesn’t even work effectively for wealthier people. If much of your wealth is outside your family home, there are several strategies you can adopt to avoid a significant bill. Conversely, if most of your wealth is tied up in your family home, it’s trickier to mitigate IHT. 

In fact, the Guardian reports that the effective rate of IHT on estates worth more than £10 million is only half the effective rate on estates worth £2 million.

The government may need the tax revenue from IHT receipts

While the abolition of IHT could mean you pay less in tax overall when you pass your assets on to your next of kin, it’s important to note that the government raises a considerable sum of money from the tax. 

In fact, This is Money states that abolishing the tax would cost the government £7 billion a year. This could potentially create a hole in the public finances at a time when the economy is already struggling. 

If the government did scrap IHT they could be forced to divert money away from public services and introduce austerity measures, which have been deeply unpopular in the past. 

What the abolition of IHT could mean for you and your estate

It’s worth remembering that, as FTAdviser reports, while IHT receipts have been rising in recent years, 93% of estates still aren’t expected to incur IHT liability in the coming years. This highlights that it’s still mostly the wealthy that pay the tax.

However, if the government did abolish IHT, then you’d likely need to rethink your estate plan. 

For instance, you wouldn’t need to be concerned about gifting some of your wealth now to reduce the value of your estate, or placing some of your assets in a trust. This could make the process of planning your estate far simpler.

However, since the government would likely need to replace the lost revenue from the abolition of IHT, they may introduce new taxes in the future to compensate for this loss. If this were the case, they may introduce levies that affect broader sections of the population, and could mean you end up paying more in tax overall.  

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If you’re concerned about an IHT bill, we can help you to create an estate plan that ensures you leave as much as you can to loved ones.

If you have any questions, please get in touch and speak to us today.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.