Legal News | 26.03.26
Inheritance Tax: arbitrary and too complex?
Inheritance tax (IHT) is a deeply unpopular tax and often subject to scrutiny by political parties and think-tanks alike. The tax has recently been described by one think-tank as “arbitrary, distortionary and expensive to administer” but, given its value to HM Treasury, is there any realistic chance of IHT being abolished or significantly reformed?
By way of reminder, IHT is a tax currently levied on the worldwide assets of all ‘long-term residents’ of the UK (and on the UK assets of those who are not ‘long-term resident’). IHT is payable on death at a rate of 40% on all assets above the ‘nil rate band’ (and additional ‘residence nil-rate band’ where available), which do not qualify for IHT exemption or relief. The 40% rate may be reduced to 36% where 10% or more of an individual’s net estate is left to charity.
Arbitrary?
Since assets have been taxed multiple times during an individual’s lifetime through income tax, VAT and national insurance contributions, it is often argued that IHT is, in effect, a form of double taxation, making it deeply unpopular with the general public.
Distortionary?
It is also argued that IHT distorts people’s decision making. Current lifetime gifting rules allow individuals to give away assets and (subject to exceptions) so long as they survive seven years, the gift falls outside the scope of IHT. This can often encourage individuals to make immediate cash transfers to their heirs, rather than saving or investing on their behalf.
Expensive to administer?
The administrative costs of collecting £8.4 billion of IHT in tax year 2024/5 was £66 million. The tax is unquestionably expensive to administer when compared with the tax revenue it raises.
At the present time, it seems fanciful for IHT to be abolished in its entirety, given the current state of the public finances. Upcoming limits to the availability of full agricultural property relief (APR) and business property relief (BPR) from IHT, as well as the application of IHT to unused pension death benefits from April 2027, demonstrates that the Government sees IHT as a core revenue stream.
Like it or not, IHT is most likely here to stay and taking appropriate advice to mitigate your own IHT exposure should remain high on your agenda. If you would like to discuss your own estate planning with the Private Client team here at Wansbroughs, please do get in touch at wealth@wansbroughs.com.
