In recent analysis, the Institute for Fiscal Studies (IFS) has explored various options for reforming inheritance tax (IHT), including increasing the IHT nil rate band (NRB) and imposing limits on crucial IHT reliefs such as business property relief (BPR) and agricultural property relief (APR).
Presently, the government receives approximately £7 billion annually in IHT receipts, derived from around 4% of deaths within the year. Despite IHT thresholds being frozen until at least 2028, the IFS report suggests a potential rise in IHT revenues to £15 billion by 2032/33, affecting 7% of deaths.
The analysis highlights a backdrop of rapidly growing wealth levels, surpassing the growth in earnings over recent decades. Additionally, the declining birth rates in the UK contribute to an increase in inherited wealth per individual.
Under existing rules, each individual has a NRB of £325,000 exempt from IHT, with an additional £175,000 residence nil rate band (RNRB) available for estates valued under £2 million, especially when a residence is directly inherited. The IFS proposes a reform option of combining the IHT nil rate band with the RNRB, allowing all estates a £500,000 NRB for assets passed to any beneficiary, but this would incur an estimated cost of £900 million. Introducing a taper for high-value estates could reduce this cost to around £700 million.
The IFS suggests that abolishing BPR would generate £1.4 billion annually, while capping BPR at £500,000 would still yield £1.1 billion and focus IHT on higher-value estates. Abolishing APR is estimated to raise £400 million annually.
Previously advocating for the inclusion of pensions in an individual’s death estate, the IFS proposes that subjecting 80% of the value of defined contribution pensions to IHT would generate around £200 million per year.
To maintain the number of estates affected by IHT at 4%, the NRB would need to be raised to £380,000, incurring a cost of £900 million, according to the report. The document also outlines the projected impacts of the proposed reforms on UK demographics and social mobility. As the party conference season commences, discussions regarding the future of IHT are likely to persist.