The idea of the government scrapping inheritance tax might seem a little far-fetched. However, the idea has seen a resurgence amongst ministers in recent weeks, with Prime Minister Rishi Sunak being urged by those within his own party to review the law.
Could scrapping inheritance tax actually be a reality? Let’s take a look at how the law works and how it benefits the government before discussing whether or not it could become a thing of the past.
How Does Inheritance Tax Work?
Inheritance tax is a tax that is owed on the estate of someone who has died. Not everyone is liable to pay inheritance tax, if an estate is valued at under £325,000, then it will not be liable for inheritance tax. However, if the estate of someone who has died is valued at over £325,000, then inheritance tax will apply.
The current rate of inheritance tax is 40%. This only applies to the portion of the estate that exceeds the threshold. For example, an estate valued at £350,000 would only have the 40% tax applied to the £25,000 excess.
How Much Does the Government Make from Inheritance Tax?
Calls for scrapping inheritance tax are nothing new, but it has long proved a reliable source of revenue for the government, so few expect it to be axed.
The government collected £7.09 billion in inheritance tax receipts in 2022/2023. This was an increase from the previous year when receipts totalled £6.05 billion. In fact, inheritance tax receipts have increased nearly every year for the past decade, apart from 2019/2020. It’s a steady and reliable income source for the government, one they’d be unwilling to do away with.
Who Wants to Scrap Inheritance Tax?
Where are the calls for scrapping inheritance tax coming from? Surprisingly, it is members of the Conservative party who seem most committed to the cause.
Former Chancellor Nadhim Zahawi has been outspoken in his opposition to the tax, and his voice has been joined by some 50 other Conservative MPs, all calling on Sunak and current Chancellor Jeremy Hunt to seriously consider scrapping inheritance tax.
According to critics of the tax, it is unfair and outdated. Some have gone even further, calling it morally wrong and demanding that it needs to be scrapped urgently before it harms more people.
According to reports, a collection of Conservative MPs known as the Conservative Growth Group will publish a report later this month, in which they will outline why they believe inheritance tax should be abolished.
However, despite mounting pressure from backbench MPs, the chances of the government scrapping inheritance tax are pretty slim. To put it bluntly, it makes them too much money for them to realistically consider getting rid of it.
What Are the Alternatives?
While scrapping inheritance tax may be a tad unrealistic, could the law be reviewed and updated? Institute for Fiscal Studies Director Paul Johnson certainly hopes so; he has called for inheritance tax to be completely overhauled, citing concerns that it contains loopholes that are exploited by the wealthy to pay less tax.
What would an overhaul of inheritance tax look like? Many would hope for a reduction in rates, which are among the highest in the world. The government could make up revenue lost from reducing rates by axing some of the existing exemptions, which can be used by people to pay less tax.
There are increasing calls to scrap inheritance tax, but getting rid of the law completely looks extremely unlikely. There is a chance we could see it overhauled and updated, but there are no changes on the horizon yet.