Is It The End For UK Inheritance Tax? - Wealth Managers' Reactions

Tom Burroughes Group Editor London 2 October 2023

Is It The End For UK Inheritance Tax? - Wealth Managers' Reactions

With the Conservative Party starting from Sunday, attention will focus on whether the party might promise to cut or even axe inheritance tax. We analyse what's at stake and take views from a variety of advisors. Public support for scrapping IHT appears to be rising.

As the annual autumn season of UK political party conferences rolls on, with a general election due for some point in 2024, tax is on the agenda. Taxes are at the earliest levels since the early 1950s.

Prime Minister Rishi Sunak recently caused consternation among parts of the media and political classes (if not all the public) by calling for the ban on sale of new petrol/diesel cars to be delayed until 2035 instead of its previous 2030 date. This kind of move to a more overtly “free market” sort of stance might also mean the Tories, still trailing the opposition Labour Party by a significant (if narrowing) opinion poll margin, might go for other policies to appeal to traditional middle class supporters. And that means cutting or even scrapping inheritance tax (IHT). 

Pressure to remove the tax appears to be growing. A Kingsley Napley/YouGov poll released on Friday last week found that 55 per cent think IHT should be completely scrapped, up from 48 per cent taking that view in October last year. 33 per cent are opposed to abolishing IHT and 13 per cent have no view.

Since 2009, the “nil-rate” IHT threshold has stayed at £325,000 ($397,922) - it doubles for spouses to £650,000). In March this year, the average price of a house in the UK was £285,000, according to official data. For many in London, the Southeast and the more affluent areas, it’s significantly higher. While still affecting only a relatively small number of the adult population, IHT is biting harder, and hitting a wider variety of people than was perhaps envisaged when “death duties” were first introduced before the First World War.

A large number of financial advisors, lawyers, accountants and tax specialists create structures and try to help affluent and high net worth individuals mitigate the impact. The IHT mitigation industry is large, almost a sector in its own right. Among the methods for lightening the burden is British Property Relief - certain types of business asset carry reliefs from IHT. Property held in Alternative Investment Market (AIM) shares for a period qualifies for this relief. There’s also the ability to avoid some of the IHT take by gifting one’s wealth to others several years before death. If a person gifts money to a child, say, seven years prior to death, none of that money falls under the estate for IHT purposes. Gifts to charity also gain relief.

But all these rules and exemptions take time and trouble to understand. And when a parent dies, for example, the need to get IHT affairs in order and settle a bill within six months coincides with what’s sure to be an emotional time. Mistakes get made. There’s the argument also that a person who leaves an estate has already paid a lot of tax on it as that wealth was constructed, so IHT is simply taking something that was already taxed. Another claim is that private individuals tend to be better custodians of wealth than the State, and that if one wants higher productivity to drive real incomes, it is better that capital is invested by individuals in a free market, not handed over to the government, largely for the purpose of funding current spending. On the other hand, claims that UK wealth inequality is unjustly high means IHT - or what in the US are called estate taxes - retain political appeal. (It is worth noting that as people typically accumulate more wealth as they get older, that wealth inequality data needs to be adjusted to account for this.)

So when stories began emerging a week ago that Sunak might announce that IHT would be cut or scrapped, it encouraged reactions from the industry. Many appear to suggest that scrapping IHT completely, at least right away, would be a mistake. 

At tax and advisory firm Blick Rothenberg, tax manager Joe Neal was dismissive of the argument that IHT was hitting a significant number of people. However, he said the nil rate band should be hiked to reflect inflation.  

“There is a huge myth about IHT which really needs to be addressed before going any further. That myth is an embedded fear across the country that the majority of the population are going to pay IHT when they die, thus robbing their family and wider beneficiaries of money from their estates, whilst taxing money they’d already been taxed on over the course of their lives,” Neal said in a note. 

“The reality is that this is completely untrue. The vast majority of people will never actually pay it and those that do are some of the richest people in the country. In fact the government’s own Inheritance Tax statistics report published this summer proves that this fear is unfounded. That report showed that in 2020/21, just 3.73 per cent of deaths in the UK (just 27,000 out of 722,000 deaths) paid anything at all. Given that in the same period there were 31.7 million people paying some form of income tax, out of a total population of 67.3 million (so 47.1 per cent of the total population), the reality is significantly less people pay IHT than pay Income Tax,” he said.  

Neal said that for most people, the existing nil rate band is “enough”, and goes up to £1 million if an estate bequeaths a main home to lineal descendants (with an estate worth less than £2 million). He also said that any mortgages and other loans or debts will reduce the value of your estate for IHT.

Neal asked whether scrapping IHT will leave the government with a revenue shortfall, given that in 2021/22 IHT collected more than £7 billion. (Former UK government advisor Lord Frost has responded by writing in the Daily Telegraph (29 September) that this figure is tiny relative to overall public spending.)

As Neal notes, those tax-advantaged investments created in order to capture tax breaks – such as AIM stocks – might suffer.

“AIM shares that have been held for over two years can be passed on free of IHT. Investment in AIM shares has been used by the wealthy to reduce their exposure to IHT,” he said. More than 700 companies are quoted on AIM. 

WealthClub, an investment firm that specialises in tax-efficient investment, unsurprisingly doesn’t want IHT to be abolished – at least not suddenly. “The sudden abolition of IHT would be very bad for the AIM market, with the potential to create significant market disruption. However, AIM is not simply a `tax dodge’,” it said. 

“Given the cost of abolishing IHT we believe the government is highly unlikely to get rid of it completely, instead implementing smaller tweaks to the rules, such as adding tiers or raising nil-rate bands. This would be more easily digested by the market,” it said.

James Ward, head of private client business at Kingsley Napley, the law firm, commented on a recent paper on IHT reform from the Institute for Fiscal Studies.

"The IFS makes an interesting point about the revenue potential from IHT. It currently stands at circa £7 billion per annum which represents less than 1 per cent of the total UK tax take and is paid by for some 27,000 estates, mostly in London and the South East. But if the current regime remains untouched this figure will likely grow in future, even without the scenario of a significant increase in property price rises in the years ahead,” Ward said. 

"If the Conservatives do include a promise to reduce IHT or scrap it altogether in their next manifesto therefore, the shortfall in revenue will need to be addressed somehow.  We know the Labour party has ruled out a Wealth Tax should they come to power, however we are still in the dark on their views regarding IHT, which I've long said is the UK's equivalent of a wealth tax,” he continued.  

Liz Palmer, partner at the Howard Kennedy private wealth practice, worried that if IHT is abolished, income tax or capital gains taxes could rise to make up the shortfall.

There’s an angle for those serving UK resident non-domiciled individuals to consider, Palmer said.  

“Many non-doms only pay UK tax on money earned in or brought to the UK, or in the case of IHT, on property situated here. Recently, there has been a renewed political focus on the need to increase the UK tax paid by non-doms. If IHT is slashed, however, the UK will instead remove one of the few taxes non-doms must pay in our country,” she said. “Another potential unintended consequence of scrapping IHT might be a decrease in charitable gifts. If you donate 10 per cent or more of the value of your estate upon death, the rate of IHT decreases from 40 per cent to 36 per cent. This is a popular strategy to mitigate the inheritance tax burden. By slashing the levy, the government would potentially abolish an important incentive to donate to charities, which could significantly impact those in need.”

(Editor’s note: many of the arguments above suggest that the IHT tax breaks are what keep certain markets humming, and boost activity that might otherwise not be as vigorous. Against that, one might argue that it is not really wise for the investment “dog” to be wagged by a tax “tail”. If, for example, many AIM stocks are kept going partly for their tax status, what does that say about the underlying economic case for those stocks in the first place? Would it not be better to axe IHT, and remove all the costly finagling of the tax system? The UK has one of the longest tax codes in the developed world and thousands of advisors and lawyers make a living advising people to mitigate it. That’s a deadweight cost and diversion of resources. Maybe IHT abolition, if it does happen, should be also part of a wider simplification drive and boost to enterprise. Comments welcome! Email


Register for WealthBriefing today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes