Inheritance Tax (IHT) has been an incredibly unpopular tax for many years, with many critics seeing it as an unfair taxation on families who have worked hard to save and build assets during their lifetime.

A replacement for Capital Transfer Tax, IHT was introduced in 1986 as an updated way of taxing someone’s estate, including property, money, and possessions, when they pass away.

Over the years, IHT has proved to be a significant money-earner for governments. Indeed, according to a recent report by MoneyAge, HMRC received £7.1 billion in IHT receipts in the 2022/23 tax year.

Despite this, according to the Guardian, prime minister Rishi Sunak is considering abolishing IHT as part of the Conservatives’ manifesto pledge. Scrapping IHT could be a way of pleasing potential voters in readiness for the next general election in 2024.

So, read on to find out what IHT is, how it may affect you currently, and what its potential abolishment could mean to you.

Your loved ones may face an IHT bill if your estate is worth more than £325,000

IHT is a tax on your estate, including property, money, and possessions, when you pass away. However, there is normally no IHT to pay if either:

• The value of your estate is below the £325,000 threshold (known as the “nil-rate band”)
• You leave everything above this threshold to your spouse, civil partner, or a charity.

Furthermore, if you give away your home to your children or grandchildren (including adopted, foster, or stepchildren), your tax-free threshold can rise to £500,000. This is due to an additional allowance, of £175,000, called the “residence nil-rate band”.

You can also combine your nil-rate bands with your spouse or civil partner, meaning you can essentially pass on up to £1 million between you without incurring a tax charge.

The standard IHT rate is 40%.

Both the nil-rate bands are frozen until 2028. As a result, and with average UK property prices rising in recent years, there may be a greater likelihood of more people facing IHT.

Despite the frozen thresholds, only 4% of UK estates are currently affected

With the general election looming, the government could see the abolition of IHT as a potential vote-winner among the electorate.

A potential reason behind adding IHT abolition to the manifesto pledge may be the fact that while government data highlights that as of 2020/21, IHT affected less than 4% of UK estates, about a third of people think that their assets will be enough to attract the tax when they die.

Since a common misconception is that IHT will affect more people than it truly does, a significant number of voters may see the planned abolition as a personal benefit to them.

HMRC received £7.1 billion in IHT receipts in the 2022/23 tax year

In recent years, IHT receipts have been steadily rising, with the Office for Budget Responsibility forecasting that receipts will reach around £8.4 billion by the 2027/28 tax year.

Despite rising receipts, and predictions that this will continue, the number of estates facing a tax charge is still very low. Government data reveals that there were around 27,000 taxpaying IHT estates in the 2020/21 tax year.

Meanwhile, the Guardian quoted a Treasury spokesperson, who suggested that more than 93% of estates are forecast to have zero IHT liability in the coming years.

The spokesperson said: “The vast majority of estates do not pay Inheritance Tax. However, the tax raises more than £7 billion a year to help fund public services millions of us rely on daily.”

Passing on your wealth could be less complicated without IHT

The rules surrounding IHT can be complicated and have far-reaching effects on how you manage your wealth.

While there are various ways to mitigate IHT, the rules and strategies used to combat the tax often require professional guidance.

For example, as it stands, pensions can be an excellent way of passing on wealth tax-efficiently, as they typically fall outside of your estate. So, if IHT is abolished, it could completely change how you draw a later-life income.

With no IHT to consider, you would be free to pass on your estate without risk of incurring a tax charge, allowing you to leave your wealth to your loved ones safe in the knowledge that it won’t be eroded by tax after your death.

Reviewing your plan and working with a financial planner could be most beneficial

Given that policy or manifesto changes can affect your financial plan, it’s important to regularly review your retirement strategy.

Indeed, we have already seen evidence of sudden changes in 2023, with Jeremy Hunt scrapping the pension Lifetime Allowance (LTA) tax charge and pledging to abolish it altogether in the future.

While some observers argue that abolishing IHT during a cost of living crisis should not be a government priority, others suggest an overhaul may be the more sensible option. As such, it may be months before any decision is made.

For the time being, it could be wise to avoid making severe adjustments to your financial or estate plans. Instead, reviewing them with your financial planner on a regular basis could be the most suitable option for you.

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Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.