Should inheritance tax be scrapped or reformed?

Inheritance tax has been hugely controversial for many years, with some arguing it needs to be reformed, and others saying it should be scrapped completely.

But the noise of the debate has recently gone up a notch, as more than 50 Conservative MPs, part of the Conservative Growth Group, are now actively calling on the government to abolish inheritance tax before the next general election.

Among the members of the group are former Chancellor of the Exchequer Nadhim Zahawi, who wrote in The Telegraph that scrapping this “morally wrong” tax would show that the government “backs families in their desire to pass on their hard-earned savings to the next generation”.

Others include former Business Secretary Jacob Rees-Mogg, who said inheritance tax is “unfair and economically damaging”, and former Home Secretary Priti Patel, who insisted that people should be able to “determine the future of the assets they have worked hard to save and build up”.

This is significant as all three were, until very recently, senior figures in government, and the current administration has – far from scrapping it completely – instead committed to freezing inheritance tax thresholds at their current levels until April 2028.

The inheritance tax threshold is currently £325,000, or £650,000 for a married couple. So if your estate is worth more than this amount, you will be liable to pay inheritance tax, with the part of the estate above the nil rate band being taxed at a rate of 40 per cent.

There is also an additional ‘residence nil rate band (RNRB)’of £175,000 for an individual and £350,000 for a married couple which could potentially bring the total nil rate band up to £1m for a married couple. (A taper reduces the amount of the RNRB by £1 for every £2 that the net value of the estate is more than £2 million).

While many people won’t have to worry about paying this charge, as their estates will be worth less than £325,000, rising house prices mean that more of us are getting caught up in the inheritance tax net.

And as Paul Johnson, Director of the Institute for Fiscal Studies, notes: “The very wealthy pay an average rate half, or less, (than) that paid by the moderately wealthy.”

“If all you leave is the family house, it’s hard to avoid. If you have millions, it is absurdly easy to avoid,” he commented.

Mr Johnson has therefore called for inheritance tax to be reformed rather than scrapped, as he believes the current system is “genuinely unfair”.

Similar concerns have been raised by Dan Neidle, Tax Lawyer and Founder of the Tax Policy Associates, who stated that while most people believe the 40 per cent rate is “unfair”, the wealthiest people only have to pay “about 20 per cent thanks to over-generous exemptions”.

Mr Neidle believes scrapping or limiting the exemptions is “the obvious answer” to this problem, as the revenues raised could be used to reduce the rate to around 20 or 25 per cent.

“Make it a fair tax, applying at a fair rate to the upper-middle class, and at that same rate to the very wealthy,” he said.

“If we abolish it, we’re losing £6 billion of tax revenue to benefit the wealthiest four per cent.”

With prominent Conservative politicians on one side of the debate and the current government on the other, perhaps the only thing we can be sure of for now is that the issue of inheritance tax looks set to feature in more column inches than it has for quite some time.

Who do you think is right? What do you think about the current system? Should it be scrapped or reformed?

As the debate rumbles on, rest assured that we’re here to offer you expert guidance on how to manage your estate and mitigate your inheritance tax liability.

If you have any questions on these issues, please don’t hesitate to get in touch.