In its recent report, the Institute for Fiscal Studies (IFS) considers several options for reforming inheritance tax (IHT). These include raising the IHT nil rate band (NRB), or capping key IHT reliefs such as business property relief (BPR) and agricultural property relief (APR).

The government currently receives around £7bn in IHT receipts annually, according to HMRC’s statistics. This tax revenue stems from only around 4% of deaths occurring within the year. However, with IHT thresholds frozen until at least 2028, the new IFS report suggests that IHT revenues could rise to £15bn by 2032/33, with the proportion of deaths affected by IHT growing to 7%.  

The report notes a backdrop of rapidly growing wealth levels, outstripping the growth in earnings over the last few decades. Along with that, people in the UK are having fewer children than in previous generations, driving up the amount of inherited wealth that each individual can hope to receive. 

Under current rules each person is entitled to a NRB of £325,000, which is free from IHT. An additional £175,000 residence nil rate band (RNRB) is available for estates worth less than £2m where a residence is closely inherited (ie, by a direct descendent). The concentration of higher value properties in London and the South means that residents there disproportionately benefit from the RNRB, the IFS argues. An option for reform therefore would be combining the IHT nil rate band with the RNRB to allow all estates a £500,000 NRB against all assets being passed to any beneficiary. This, however, would cost an estimated £900m to finance. Retaining a form of taper for high value estates would lessen the cost to around £700m. 

Abolishing BPR would raise £1.4bn annually, the IFS suggests, while capping BPR at £500,000 would still raise £1.1bn and narrow the scope of IHT to affect more high value estates. Abolishing APR would raise £400m annually. 

The IFS has previously called for pensions to be included within an individual’s death estate, rather than enjoying their current IHT exempt status. Bringing 80% of the value of defined contribution pensions within the scope of IHT would raise an estimated £200m a year.  

Some interesting figures are also provided for options to maintain the number of estates affected by IHT at 4%. For instance, if all other rules were kept as they are, the NRB would need to be raised to £380,000. This would cost the exchequer £900m.  

The report includes estimated impacts of the proposed reforms on UK demographics and its effects on social mobility. With party conference season now underway, the debate about the future of IHT is likely to continue.  

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