A reduction in inheritance tax would impact only 12,000 families

Increasing the inheritance tax (IHT) threshold to £500,000 and eliminating the residence nil rate band (RNRB) would have a limited impact, benefiting only about 12,500 families, according to an analysis by Quilter. The potential move, rumored ahead of the Autumn Statement, is estimated to cost the Treasury an annual average of £1.4 billion. In the 2020-21 tax year, 27,000 estates paid IHT, generating £7.5 billion for the Exchequer, a 17% increase from the previous year. However, the IHT rate, set at 40% for assets exceeding £325,000 for individuals and £650,000 for couples, is under scrutiny for potential reduction.

Cutting the IHT rate to 30% would result in an annual cost of nearly £2 billion, while a halving of the rate to 20% would incur a substantial £3.75 billion expense. The nil rate band (NRB), stagnant at £325,000 since 2009, has not kept pace with property value increases. If adjusted for inflation, it would have reached£489,700, as calculated by Evelyn Partners.

The residence nil rate band, introduced in 2017 to alleviate IHT on property transfers to offspring, faces criticism for its complexity and restrictions based on specific criteria. Shaun Moore, a tax and financial planning expert at Quilter, suggests that modernizing IHT could enhance the Conservative party's popularity, with potential changes including an increase in the NRB and removal of the RNRB, simplifying the tax landscape without imposing a significant long-term cost.

While reducing the headline tax rate may be popular, it poses financial challenges for the government, and individuals may still face IHT bills. Moore notes that any benefits from changes might be short-lived, especially if Labour forms the next government and alters IHT reliefs, such as business property relief and agricultural property relief.

Inheritance tax, paid by a small percentage of estates (around 3%), remains an unpopular tax, making it a potential focal point in the lead-up to an election. Sian Steele, head of tax at Evelyn Partners, suggests that the abolition of IHT could be a manifesto promise rather than an immediate policy change. Speculation also revolves around merging the RNRB into the main NRB, creating a simplified IHT-free allowance of£500,000, benefiting those without direct descendants or estates exceeding £2million. Steele emphasizes the impact of the 14-year freeze on the NRB, bringing more modest households into the IHT purview as property and asset prices rise. Additionally, the 40% headline rate for estates subject to the taxis deemed quite high.