Prime minister Rishi Sunak is reportedly considering a cut to inheritance tax, ahead of the next general election.
It has been reported that there is a “live discussion” at the highest level about the reform of the tax and could see the eventual abolition of inheritance tax, according to the Sunday Times.
Currently, IHT is charged at 40 per cent for estates worth more than £325,000, with an extra £175,000 allowance towards a main residence.
A married couple can share their allowance, which offers the ability to pass on £1mn to their children without any tax to pay.
Among the proposals for consideration is to reduce the 40 per cent IHT rate, making it easier to abolish in later years.
However, the publication reported that a senior government source said: “No 10 political advisers have been looking at abolishing inheritance tax as something that might go in the manifesto. It’s not something we can afford to do yet.”
Rachael Griffin, tax and financial planning expert at Quilter, said this is expected as the Conservatives “test the water on how to drum up support” ahead of the Autumn Statement and an election next year.
“A promise of the reducing or even eliminating one of the most hated taxes in Britain and one many perceive as inherently unfair will be music to many voters’ ears,” she said.
“While most Britons do not suffer IHT, there are many more middle-income earners, particularly in the south east of England, being caught by it due to property price growth and inheritance tax thresholds which remain frozen until 2027/28.
“However, amidst the crowd-pleasing announcements, there will likely be a sting in the tail.”
Griffin said Britain’s finances are not looking on a particularly sure footing and the revenue generated from IHT is set to reach a record £8bn this year.
Last week, the total amount of IHT raised between April and August of this year was £0.3bn higher than in the same period last year.
HM Revenue and Customs explained that it had received £3.2bn in IHT over Q2 2023, an increase on the £2.9bn that was reported last year.
Griffin said: “While it is not a huge generator of Treasury revenue, IHT is playing an increasingly significant role in the UK's economic framework.
“As the government navigates the tightrope of public approval and fiscal responsibility, abolishing this revenue source altogether will create a fiscal hole that needs to be filled.
“The answer might just be unpalatable to people and those calling for IHT to be completely scrapped may need to be careful what they wish for as it opens the door to new kinds of wealth taxes under a future government. “
She explained that the Tory’s challenge here is to strike a balance between appeasing the sentiment of enough voters while not over promising IHT reform which can be seen as an aspirational offer to voters, but it's also very easy to frame IHT reform as a giveaway to the wealthy, meaning it represents something of a political gamble.
“Opting for a sliding scale of IHT based on estate could prevent this perception so that total abolition isn’t simply seen favouring the rich however this might not be enough to appease core Tory voters,” she said.
“Increasing the nil rate band to £500,000 and £1mn for married couples would be relatively straightforward.
“It could be accompanied by the removal of the residence nil rate band, as it is complex, and favours married households only.”
She said the government could also look at simply lowering the headline rate of 40 per cent.
“A 20 per cent rate alongside the removal of many of the available exemptions would be sensible and help to simplify IHT.
“The government should also review and increase gifting allowances to bring them in line with the cost of living in 2023.”
sonia.rach@ft.com
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