Rishi Sunak has intimated in recent weeks that he may scrap inheritance tax in its entirety. By no means the only divisive policy change he has presented at this week’s Conservative Party Conference, but certainly the one that will have the largest impact in the Private Wealth world.

Inheritance tax is currently set at a rate of 40% of a person’s taxable estate. The key phrase in that sentence being “taxable estate”, which is the proportion of a person’s estate left after the deduction of all available reliefs and exemptions. For many people, their taxable estate will be nil, and no inheritance tax will be payable. Indeed, less than 5% of estates pay inheritance tax in the UK.

This is because of the existence of the Nil-Rate Band, to which every person in the UK is entitled. The Nil-Rate Band has been set at £325,000 since 2009. Married couples will also have the benefit of their deceased’s spouse’s Nil-Rate Band, known as the “Transferable Nil-Rate Band”, offering a further £325,000 in tax-free allowance. Since tax year 2017/18, there has also been the availability of the Residence Nil Rate Band, which is a further £175,000 of tax-free allowance. This broadly applies provided a person leaves their home to their children (including step and foster children, and children of whom you are a guardian) or grandchildren and their estate is not worth over £2m. Again, married couples benefit from their deceased’s spouse’s Residence Nil Rate Band. Finally, there is the spouse exemption, which means anything left to a surviving spouse is not taxed.

The consequence of these allowances and the spouse exemption is that for a married couple who leaves their entire estate to the surviving spouse on the first spouse’s death and then to children or grandchildren on the second spouse’s death, there is the potential for £1,000,000 worth of tax-free allowances.

Some may ask why is so much attention being focused on a tax that impacts such a small proportion of estates. Well, one argument is that the estates required to pay inheritance tax are of those individuals who will already have paid a significant amount of income tax throughout their lifetimes as they are typically higher earners, which is how they have accumulated such wealth on death. Is it right that those individuals are in effect taxed twice?

On the other hand, shouldn’t the highest earners in our society pay the most tax, both during their lifetime and on death? Not least given the significant investment that is going to be required over the coming years in the UK’s public services because of its ageing and growing population. Surely now is not the time to be scrapping taxes.

That being said there is an appetite amongst the UK population for inheritance tax to be scrapped, or at least the burden of it lessened. Noting the hypothetical situation set out above, perhaps the answer to Rishi’s predicament is to modernise the reliefs so they are in keeping with today’s society.

The Nil-Rate Band has remained at £325,000 since 2009 and will do until tax year 2025/26, despite house prices exponentially increasing since 2009. For most people, their main asset is their house and they do not wish to sell it simply to avoid an inheritance tax bill – after all life is for the living. Perhaps Rishi could consider increasing the Nil-Rate Band so that it matches current house prices.

The spouse exemption could also be extended to cohabiting couples, given the significant rise of cohabitation in the last 20 years. Whilst those looking to encourage a marriage proposal may feel slightly vexed that they can no longer rely on tax cuts as a reason to convince their partner to propose, the benefit to many other couples would be substantial.

At present, inheritance tax remains, so if you require advice on either planning for it on your death or calculating and paying it now following a loved one’s death, please contact a member of our Private Wealth team.

Picture of Zoe Norton

Zoe Norton


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