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Although contradictory to this warning, there have been musings of a potential scrapping of Inheritance Tax (IHT) altogether, at some point in the future. Such a move would likely cause divided opinions, in particular given that the tax is generally only paid by those with the most wealth in society. In any case, can the government afford to lose the revenue it generates?
According to HMRC statistics, the government currently receives only around £7bn a year in IHT receipts, arising from only 4% of deaths occurring within each year. However, with IHT thresholds being frozen until 2028, a new Institute for Fiscal Studies (IFS) report suggests that IHT revenues could more than double to around £15bn by 2032/33, with the proportion of IHT-impacted deaths increasing to 7%. The report highlights rapidly growing wealth levels, surpassing the growth in earnings over recent decades, coupled with the fact that people are having fewer children than in previous generations, driving up the amount of inherited wealth that potential beneficiaries can expect to receive.
In its report, the IFS has considered several options for reforming (rather than abolishing) IHT, including:
- Raising the IHT nil rate band (NRB). Currently, each individual is entitled to a NRB of £325,000 as well as a £175,000 residence NRB (RNRB), for primary estates of less than £2 million that are passed on to lineal descendants. However, given the appreciation in property values within London and Southern England and the disproportionate benefit arising to those residents, the IFS has presented the option of combining the IHT NRB with the RNRB to provide all estates with a £500,000 NRB that can be set against the value of all assets being passed to any beneficiary. The cost of this reform is however expected to be in the region of £700m per year.
- Capping or completely abolishing key IHT reliefs such as Business Property Relief (BPR) and Agricultural Property Relief (APR). The IFS calculates that abolishing APR would raise £400m per annum while abolishing BPR would raise £1.4bn and capping it at £500,000 would still raise receipts by £1.1bn per year.
- Bringing pension pots within the charge to IHT, raising around £200m per year.
There have been many predictions of changes to IHT over the years, with few having actually been implemented. It is more likely that IHT, whether loved or loathed, is here to stay for the foreseeable future and the potential impact on individuals’ estates should be evaluated.