Farewell to inheritance tax?

IHT is charged at the rate of 40% on estates worth more than £325,000. However, there is also a further allowance of £175,000 that can be set against the value of a main residence if the property is inherited by descendants. Both allowances are shared between spouses or civil partners, so there is a potential family exemption of £1 million.

Although the combination of frozen allowances and higher property values has brought more estates into the IHT net, the tax is only paid on around 4% of estates.

Argument for change

Given that investments are generally paid for out of taxed income, IHT can be seen as a double charge to tax, preventing people passing on their wealth to children and grandchildren.

• It applies to virtually all assets, without the exemptions given for capital gains tax – such as for a main residence.
• Although IHT is mainly paid by the wealthy, the very rich typically have far more scope for reducing their overall IHT burden by, for example, making lifetime gifts and using trusts.

The moderately wealthy, where a main residence may account for the majority of wealth, may not be able to afford such tax planning measures.

How likely?

Although a rate reduction of a percentage point or two cannot be ruled out, full abolition is almost certainly going to be too costly in the current economic climate – some £7 billion in lost tax revenue annually – especially as HMRC is on course to have a record-breaking year from IHT receipts.

Then there is the forthcoming general election. A Labour government would be more likely to move in the opposite direction by cutting IHT allowances – in particular, the £175,000 main residence allowance.

In the meantime, if your estate may become liable for IHT, there are measures you can take. HMRC’s basic guide to IHT, including details of various exemptions, can be found here.