Tax Planning

Is Inheritance Tax Reform on the Way?

· 3 min read

Inheritance tax often makes big headlines and there has been plenty of noise around it in the past year. Calls for its reform have been growing stronger. The latest fall in Inheritance Tax (IHT) receipts pushes reform to the centre of Chancellor Rishi Sunak’s agenda once again.


Inheritance tax often makes big headlines and there has been plenty of noise around it in the past year. Calls for its reform have been growing stronger. The latest fall in Inheritance Tax (IHT) receipts pushes reform to the centre of Chancellor Rishi Sunak’s agenda once again.

HMRC Announces a Reduction in Tax Receipts

The most recent change to IHT tried to tackle the problem of rising numbers of people having to pay the tax on their properties. The introduction of the residence nil-rate band (RNRB) in 2017 offered a new tax planning option for estates. The rate currently offers up to £175,000 relief on the value of the home and according to the recent HMRC statistics, many people opted to use it.

HMRC received £5.2bn in IHT payments in 2019/20, which is 4% less than the previous year. It is also the first time IHT receipts have fallen in 10 years. A big reason behind the drop is the RNRB threshold, with over 20,000 estates having used it for the 2017/18 tax year. The relief meant that on that year, HMRC missed £3.1bn worth of tax payments that it would have received without the relief. Although a reduction in taxes can be good news to the taxpayer, falling tax receipts can present big problems to the Government.

Are Changes to IHT on the Pipeline?

The most obvious way to tackle falling tax receipts is often a reform of the system. When it comes to IHT, the Government currently has no official changes in the pipeline.

The nil-rate band was introduced gradually from 2017 to 2020. The final change was introduced in April 2020 for the 2020/21 tax year. While many were expecting for changes to IHT in the March Budget, the Government has not proposed any changes yet.

Will the Government Reform IHT?

Even though the Government hasn’t made proposals, the calls for reform are growing louder. The Office for Tax Simplification (OTS) recommended IHT reform in its independent review in 2019. OTS’s proposed reforms would:

  • Slash the seven-year rule to five years on gifts.
  • Abolish the taper relief system on lifetime gifts.
  • Change the life insurance death benefit system to ensure these always fall outside of the deceased person’s estate for IHT purposes.

A proposal from a cross-party group of MPs has also asked the Government to consider changing the current system. The proposal called for a reduction of the current rate from 40% to 10%.

The Government might be forced to introduce reforms due to two, related issues. First, the falling tax receipts are presenting a problem for the Government. The decrease is made worse by the second point, which is the economic impact of the COVID-19 pandemic.

Experts are predicting reforms, even though not everyone is on board with them. Julia Rosenbloom, head of private client tax at Smith & Williamson’s Birmingham base, warned about significant changes to IHT and capital gains tax on the Wealth Manager podcast. The next Budget, expected to be in October, should reveal what direction the Government decides to take.

Managing Your Inheritance Taxes

Rising property prices have made more people pass the inheritance tax threshold in the past few years. Upcoming changes might also introduce new rules that might change how you manage your estate.

It’s a good time to learn about IHT and ways you can manage your tax bill. You can limit the burden in simple ways with things like life insurance and even pension contributions. You can find more about those in our comprehensive guides on how to reduce inheritance tax on property, Read part one here and part two here.

Krista Lomu
Krista Lomu
Krista has been writing about finance for nearly a decade. Based in London, she hopes to turn even the most complicated topics to approachable and interesting for readers. When she's not writing and working with small businesses, she likes to read, watch football and play games - fuelled on by many cups of coffee!
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