In a new report Reforming inheritance tax, the Institute for Fiscal Studies expects IHT to bring in over £15bn by 2032/33 (at today’s prices), with one in eight people affected by the tax, compared to around 4% of estates falling within scope in 2020/21.
The cost of abolishing IHT completely would be £7bn today, with around half of the benefit going to those with estates of £2.1m or more at death, says the IFS. The overwhelming vast majority of estates would naturally be unaffected.
Although abolition would be a political decision, the IFS highlights several practical problems with the design of the tax:
reliefs for business property, agricultural property and pensions present potential avoidance opportunities, while the residence nil-rate band (presumably taken together with the main nil-rate band and transfer of unused NRB to a spouse) is of greater benefit to those in London and the south of England - eliminating special treatment for certain types of asset could be one area for reform, suggests the IFS (although capping reliefs at a certain threshold rather than outright abolition could be an option);
increasing the nil-rate band to £500,000 (absorbing the residence NRB) would make the system fairer; and
reform of reliefs could fund an increase in the NRB to £525,000, or a cut in the rate of IHT to around 25%.
The report follows recent speculation that the government is considering cuts to IHT before the next general election.
Commenting on the report, James Ward, head of private client at Kingsley Napley LLP said: ‘The IFS makes an interesting point about the revenue potential from IHT. It currently stands at circa £7bn pa which represents less than 1% of the total UK tax take and is paid by for some 27,000 estates, mostly in London and the South East. But if the current regime remains untouched this figure will likely grow in future, even without the scenario of a significant increase in property price rises in the years ahead.
‘For those feeling unsettled by the current focus on the future of IHT, my advice is to carry on with well considered estate planning – nothing is likely to change in the short term and most succession plans see inheritance tax mitigation as one small piece of the jigsaw, with control over assets being the most important.’
Stevie Heafford, tax partner at HW Fisher, said: “Given that HMRC is on track for a record-breaking year for inheritance tax receipts, it would be an odd move from an economic perspective. However, the chancellor’s decision last year to freeze the nil rate band until 2028 means that more Britons are finding themselves caught in the inheritance tax trap.
‘It’s an extremely unpopular tax, especially amongst the middle class who are the most affected. Unlike upper class families who can afford to make more generous lifetime gifts without it impacting their day-to-day lives, working families need to hold onto their assets for longer, increasing the risk of their loved ones paying inheritance tax if they leave gifting too late. Scrapping inheritance tax would also make the UK’s overly complicated tax system more simple and easy for people to understand. Individuals generally are not clear on the inheritance tax reliefs that are available to them and can easily miss out on tax breaks that they are entitled to.
‘There have been rumours in the past that instead of abolishing inheritance tax, the tax-free uplift for capital gains on death would be scrapped instead – this was the safeguard against double taxation. If the Conservatives decide to scrap inheritance tax, we should keep a close eye on what happens to the tax-free uplift. It could be that the government will give with one hand, but take from the other.’
In separate analysis, Tax Policy Associates have found that the point at which IHT first applies in the UK (the NRB) is much higher/later than in many other countries noting: ‘by the time we get to estate values of 27 x average earnings (£1m in the UK), every country on the chart is charging tax, except the UK and the US (plus of course the countries that don’t have an inheritance tax at all)’. The report acknowledges, however, that the 40% rate means that the UK catches up quickly, with one of the highest rates of tax for estates worth 80 x average incomes (£3m in the UK).
One key finding is around the relationship between the rate of IHT and how much tax is actually collected. In Denmark, Netherlands and Germany, for example, where rates of tax are lower, the amount of tax collected is similar to that in the UK – one result of a tax which combines a high rate and poorly targeted or overly generous reliefs and exemptions.
Dan Neidle offers some suggestions: ‘My proposal is simple. Let’s be more Netherlands. Aim to collect the same amount of tax, and from the same people. Keep the £1m threshold, but simplify it. Make the exemptions less generous, and use the proceeds to greatly reduce the rate – perhaps even to as low as 20%. A fairer and more effective inheritance tax system.’
In a new report Reforming inheritance tax, the Institute for Fiscal Studies expects IHT to bring in over £15bn by 2032/33 (at today’s prices), with one in eight people affected by the tax, compared to around 4% of estates falling within scope in 2020/21.
The cost of abolishing IHT completely would be £7bn today, with around half of the benefit going to those with estates of £2.1m or more at death, says the IFS. The overwhelming vast majority of estates would naturally be unaffected.
Although abolition would be a political decision, the IFS highlights several practical problems with the design of the tax:
reliefs for business property, agricultural property and pensions present potential avoidance opportunities, while the residence nil-rate band (presumably taken together with the main nil-rate band and transfer of unused NRB to a spouse) is of greater benefit to those in London and the south of England - eliminating special treatment for certain types of asset could be one area for reform, suggests the IFS (although capping reliefs at a certain threshold rather than outright abolition could be an option);
increasing the nil-rate band to £500,000 (absorbing the residence NRB) would make the system fairer; and
reform of reliefs could fund an increase in the NRB to £525,000, or a cut in the rate of IHT to around 25%.
The report follows recent speculation that the government is considering cuts to IHT before the next general election.
Commenting on the report, James Ward, head of private client at Kingsley Napley LLP said: ‘The IFS makes an interesting point about the revenue potential from IHT. It currently stands at circa £7bn pa which represents less than 1% of the total UK tax take and is paid by for some 27,000 estates, mostly in London and the South East. But if the current regime remains untouched this figure will likely grow in future, even without the scenario of a significant increase in property price rises in the years ahead.
‘For those feeling unsettled by the current focus on the future of IHT, my advice is to carry on with well considered estate planning – nothing is likely to change in the short term and most succession plans see inheritance tax mitigation as one small piece of the jigsaw, with control over assets being the most important.’
Stevie Heafford, tax partner at HW Fisher, said: “Given that HMRC is on track for a record-breaking year for inheritance tax receipts, it would be an odd move from an economic perspective. However, the chancellor’s decision last year to freeze the nil rate band until 2028 means that more Britons are finding themselves caught in the inheritance tax trap.
‘It’s an extremely unpopular tax, especially amongst the middle class who are the most affected. Unlike upper class families who can afford to make more generous lifetime gifts without it impacting their day-to-day lives, working families need to hold onto their assets for longer, increasing the risk of their loved ones paying inheritance tax if they leave gifting too late. Scrapping inheritance tax would also make the UK’s overly complicated tax system more simple and easy for people to understand. Individuals generally are not clear on the inheritance tax reliefs that are available to them and can easily miss out on tax breaks that they are entitled to.
‘There have been rumours in the past that instead of abolishing inheritance tax, the tax-free uplift for capital gains on death would be scrapped instead – this was the safeguard against double taxation. If the Conservatives decide to scrap inheritance tax, we should keep a close eye on what happens to the tax-free uplift. It could be that the government will give with one hand, but take from the other.’
In separate analysis, Tax Policy Associates have found that the point at which IHT first applies in the UK (the NRB) is much higher/later than in many other countries noting: ‘by the time we get to estate values of 27 x average earnings (£1m in the UK), every country on the chart is charging tax, except the UK and the US (plus of course the countries that don’t have an inheritance tax at all)’. The report acknowledges, however, that the 40% rate means that the UK catches up quickly, with one of the highest rates of tax for estates worth 80 x average incomes (£3m in the UK).
One key finding is around the relationship between the rate of IHT and how much tax is actually collected. In Denmark, Netherlands and Germany, for example, where rates of tax are lower, the amount of tax collected is similar to that in the UK – one result of a tax which combines a high rate and poorly targeted or overly generous reliefs and exemptions.
Dan Neidle offers some suggestions: ‘My proposal is simple. Let’s be more Netherlands. Aim to collect the same amount of tax, and from the same people. Keep the £1m threshold, but simplify it. Make the exemptions less generous, and use the proceeds to greatly reduce the rate – perhaps even to as low as 20%. A fairer and more effective inheritance tax system.’
