Inheritance tax has long been a controversial levy and the debate over scrapping it completely has been rumbling on for many years.
So we note with interest the swirling rumours that the government is considering cutting inheritance tax and potentially scrapping it completely.
According to the Sunday Times, Rishi Sunak wants to phase out the levy by reducing the 40 per cent inheritance tax rate. This would be announced in the Spring Budget in March, alongside details on how it could be abolished completely further down the line.
This would certainly be a headline grabber for the Prime Minister ahead of the general election, even if this particular tax only applies to less than four per cent of the population at the moment.
That’s partly because wealth among older individuals is growing rapidly, so the proportion paying inheritance tax could surpass seven per cent by 2032-33.
So if inheritance tax were to be scrapped, what would it mean for you?
Well, according to the Institute for Fiscal Studies, abolishing inheritance tax would lead to the wealthiest one per cent of the population – those with estates worth at least £2.1 million – getting an average tax cut of around £1.1 million.
But while this would be hailed by many of those likely to benefit, it would also be politically problematic for Rishi Sunak if it were to happen.
At a time when many people are struggling with high inflation and public sector workers are striking over pay and conditions, how would a tax giveaway to the rich be perceived?
According to a poll commissioned by the Trades Union Congress (TUC), just 20 per cent of people support a reduction in inheritance tax, while 60 per cent want it to remain as it is or be increased.
“Abolishing inheritance tax would be a huge tax cut for a very small, very wealthy minority and drain £7 billion from the public purse each year,” said Paul Nowak, General Secretary of the TUC.
“It’s no surprise that a clear majority of the public oppose lower inheritance tax thresholds and instead want the wealthiest to pay their fair share.”
David Sturrock, a Senior Research Economist at IFS, acknowledged there are “reasonable arguments” for and against an inheritance tax, and stressed that as inheritances grow in size, it’s important to address problems in the current system.
“The government should abolish the special treatment given to business assets, certain types of shares, agricultural assets, pensions and homes passed to direct descendants,” he said.
“These exemptions and reliefs open up channels to avoid inheritance tax. This is costly, unfair and distorts economic decisions. Reforming them could raise as much as £4.5 billion in additional revenue.”
Of course, what may or may not be announced in the Chancellor’s Budget in March remains to be seen.
But the reports of proposed changes to the inheritance tax may have fired the starting gun on the next general election, which could happen only weeks after the Chancellor delivers his statement.
Whatever happens, we’ll be at your side to navigate you through this complex system, so you can be in control over what happens to your assets when you die.
If you have any questions about mitigating your inheritance tax liability and your wider estate planning, please get in touch with our specialist team and we’ll be happy to speak with you.