Is inheritance tax the most contentious tax?

Inheritance tax (IHT) is a highly emotive topic, and a lucrative matter for the government. According to HMRC, the UK Treasury received more than £5.3bn in income from IHT from April to December 2022.

With the threshold at which estates become liable for IHT frozen until 2028, and inflation high, an increasing number of estates will be required to pay IHT in the coming years. Little surprise, then, that 52% of UK adults would like to see IHT scrapped, or at least reduced, according to our research*.

As part of the 2022 Autumn Statement, the UK government made the decision to maintain the IHT ‘nil rate’ band threshold at £325,000 until 2028. To reiterate, this is the point at which estates become large enough to be deemed liable to pay IHT (currently payable at a rate of 40% of the estate’s value). Meanwhile, asset prices (including property prices) have been rising: as more estates rise in value, more will move beyond the threshold for IHT, further increasing government income from this unique tax avenue.

Indeed, HMRC figures show that income from IHT for the 2021/22 tax year reached a record £6.1bn. This marked a 14% (£729m) increase on the previous tax year – the largest single-year increase since 2015/16.

What did our survey tell us about views on IHT?

Our survey covered 2,000 adults around the country, and revealed strong feelings about IHT, as you can see below. While there was plenty of common ground, we also saw divergence along political lines, by age and gender groups, and by location around the country.

Will IHT ever be scrapped?

It’s clear that cutting or dropping IHT would be a popular move, but it’s probably safe to rule out the scrapping/reduction of IHT in the short term, given the current debate about government spending and tax cuts.

IHT income for the government is at an all-time high (both in terms of the total amount received, and as a percentage of GDP), underlining its importance to government funding. IHT income for the government reached £6.1bn for the tax year 2021/2022, and forecasts indicate that this will rise to more than £6.7bn in the current tax year (2022/2023) – a potentially critical resource as the government looks to reduce its spending and make back some of the funding paid out over the COVID-19 era.

How should I manage my exposure to IHT liabilities?

Like much of the tax system, IHT rules are not especially straightforward. Besides the £325,000 nil rate band, anyone leaving their property to direct descendants is entitled to an extra £175,000 ‘residential nil rate band’, assuming their estate does not exceed £2 million. This enables an estate to reach £500,000 before becoming liable for IHT. Further, if someone dies and leaves their estate to their spouse or civil partner, their spouse/civil partner will not pay IHT on this inheritance. Indeed, they will then be able to add the unused percentage of their own allowance to their spouse/civil partner’s, enabling them to pass on up to a combined £1m before IHT kicks in.

We believe that the nuanced detail around IHT legislation only serves to further highlight the importance of seeking good financial advice. As ever, we recommend regularly reviewing your affairs to ensure that you are managing your wealth in the most tax-efficient way possible, and keeping your long-term needs at the forefront of your plan.

* Study conducted by independent research company Opinion among a nationally and politically representative sample of 2,000 UK adults aged 18-plus between September 21st and 23rd 2022 using an online methodology.