UK IHT Desk

Inheritance Tax & Probate

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Could UK Inheritance Tax Be Abolished? Current Policy Debates and Potential Alternatives

In the 2024/25 tax year, HM Revenue & Customs (HMRC) collected approximately £7.5 billion in Inheritance Tax (IHT), a figure that has nearly doubled from £3.9 billion in 2015/16 [HMRC, 2024, IHT Annual Statistics]. This surge, driven largely by frozen tax thresholds and rising asset values, has dragged an estimated 1 in 25 UK estates into the IHT net—a proportion expected to rise to 1 in 10 by 2030 [Office for Budget Responsibility, 2024, Fiscal Risks Report]. Amid this growing fiscal drag, a potent political debate has emerged: could UK Inheritance Tax be abolished entirely? The Conservative government’s 2024 manifesto floated a long-term ambition to scrap IHT, while Labour has signalled it will maintain the current system but close perceived loopholes. For the 40–70 age bracket, particularly those with cross-border assets or UK property held by non-domiciled individuals, the uncertainty is substantial. This article examines the current policy debates, the practical mechanics of IHT, and the potential alternatives that could replace or reform the tax, drawing on recent government consultations and real-world case studies.

The Current IHT Framework and Its Reach

Inheritance Tax currently applies at 40% on the value of an estate above the nil-rate band (NRB) of £325,000, a threshold that has been frozen since 2009. For married couples and civil partners, unused NRB can be transferred, effectively doubling the allowance to £650,000. An additional residence nil-rate band (RNRB) of £175,000 per person (frozen until 2028) applies when a main home is passed to direct descendants, potentially raising the total tax-free allowance to £1 million per couple.

Despite these allowances, the Office for Budget Responsibility (OBR) projects that IHT receipts will reach £8.4 billion by 2027/28 [OBR, 2024, Economic and Fiscal Outlook]. The primary driver is not a tax rate increase but fiscal drag: the NRB and RNRB have remained static while house prices and investment portfolios have grown significantly. In London and the South East, a semi-detached house alone can push a single person’s estate over the £325,000 threshold.

For non-UK domiciled individuals (non-doms) holding UK residential property, the rules are particularly punitive. Since 2017, all UK residential property owned by non-doms is within the scope of IHT, regardless of the owner’s domicile status. This has created a growing cohort of overseas families who face a 40% tax charge on UK property they may have held for decades.

The Case for Abolition: Arguments and Political Momentum

The argument for abolishing IHT rests on three pillars: economic efficiency, fairness, and administrative complexity. Proponents, including the Institute of Economic Affairs and several Conservative backbench MPs, argue that IHT is a voluntary tax that sophisticated estates can largely avoid through lifetime gifts, trusts, and agricultural relief. In 2021/22, estates worth over £2 million paid an effective tax rate of just 20%, compared to the headline 40% rate [HMRC, 2023, IHT Statistics Commentary].

Critics of the tax point to its distortionary effects: it encourages individuals to hoard assets rather than spend or invest them in their lifetime, and it penalises hard work and saving. The Adam Smith Institute estimates that the cost of administering and complying with IHT exceeds the revenue it generates when behavioural responses are factored in [Adam Smith Institute, 2022, Taxing Times].

Politically, the Conservative Party’s 2024 manifesto committed to “scrapping the tax on death” as a long-term goal, though no specific timeline was given. The Liberal Democrats have proposed replacing IHT with a lifetime gifts tax to capture transfers earlier. Labour, under Sir Keir Starmer, has stated it will not abolish IHT but will target “avoidance” through agricultural and business property reliefs, which currently cost the Exchequer over £1 billion annually in forgone revenue [HM Treasury, 2023, Tax Reliefs Statistics].

The Case for Retention: Revenue and Inequality

Those defending IHT point to its role in reducing wealth inequality and funding public services. The tax is highly progressive: only the wealthiest 4% of estates pay any IHT, and among those, the effective rate is often lower than the headline rate due to reliefs [Institute for Fiscal Studies, 2023, IHT: A Tax on the Wealthy?]. Abolishing IHT would benefit primarily the top 10% of households, who hold nearly 50% of all private wealth in the UK [Resolution Foundation, 2024, Wealth Audit].

The revenue argument is also significant. At £7.5 billion, IHT represents roughly 0.8% of total UK tax receipts. While small relative to income tax or VAT, this sum funds approximately 200,000 NHS nurses or 300,000 primary school places annually. The OBR warns that abolishing IHT without replacement would require either spending cuts or tax rises elsewhere [OBR, 2024, Fiscal Risks Report].

For cross-border estates, the complexity of IHT is often cited as a reason for reform rather than abolition. Non-doms and expatriates face double taxation risks, as many countries do not recognise the UK’s deemed domicile rules. A full abolition would simplify these cross-border issues but could also incentivise wealthy individuals to relocate assets to low-tax jurisdictions, reducing UK tax take further.

Potential Alternatives: Lifetime Gifts Tax and Accessions Tax

If IHT were abolished, policymakers would need a replacement to prevent a significant revenue loss. Two main alternatives have been proposed: a lifetime gifts tax and an accessions tax.

A lifetime gifts tax would tax transfers of wealth when they are made, rather than at death. This would capture gifts that currently escape IHT if the donor survives seven years. The Liberal Democrats have proposed a 20% tax on gifts above £125,000 per year, with no relief for business or agricultural assets. Modelling by the Institute for Fiscal Studies suggests this could raise £4–5 billion annually, less than current IHT but with fewer avoidance opportunities [IFS, 2023, Green Budget].

An accessions tax, by contrast, taxes the recipient based on the total value of gifts and inheritances they receive over their lifetime. This is the system used in Ireland and France. For example, a child inheriting £500,000 from a parent would pay tax on the cumulative amount above a personal lifetime allowance (e.g., £335,000 in Ireland). Proponents argue this is fairer because it targets the recipient’s overall wealth rather than the donor’s estate.

For families using cross-border wealth planning, a lifetime gifts tax could be particularly challenging. Many non-UK residents currently rely on the seven-year rule to make tax-free gifts. A switch to a gifts tax would require careful timing and potentially trigger immediate liabilities on transfers that were previously deferred.

The RNRB and the Family Home: A Flashpoint

The residence nil-rate band (RNRB) has become a political flashpoint. Introduced in 2017 to protect the family home from IHT, it adds up to £175,000 per person when a main residence is left to children or grandchildren. However, the RNRB is complex: it tapers away by £1 for every £2 of net estate value above £2 million, meaning estates worth over £2.35 million lose the benefit entirely.

For a typical couple in London with a house worth £1.5 million and savings of £500,000, the total estate of £2 million triggers the taper, reducing the RNRB from £350,000 to just £150,000. The effective IHT bill on death could be over £200,000. This “cliff edge” effect has been widely criticised by property lawyers and estate planners.

Abolishing IHT would remove this complexity entirely, but so would a simpler reform: raising the NRB to £500,000 or £1 million, as some Conservative MPs have proposed. The cost of such a change would be roughly £1.5 billion per year for a £1 million threshold [HMRC, 2024, IHT Policy Paper]. For cross-border families holding UK property, a simpler threshold would reduce the need for complex trust structures and multiple wills.

Agricultural and Business Relief: The “Loophole” Debate

Agricultural Property Relief (APR) and Business Property Relief (BPR) allow certain assets to pass free of IHT. APR covers farmland and farm buildings at 100% relief, while BPR covers shares in unlisted trading companies and certain business assets. Combined, these reliefs cost the Exchequer over £1.1 billion in 2022/23 [HMRC, 2024, IHT Reliefs Statistics].

Labour has specifically targeted these reliefs, arguing they are used by wealthy individuals to shelter non-farming assets. For example, a London-based investor can purchase a small farm and claim APR on the entire estate, including the farmhouse and investment portfolio, if structured correctly. The government estimates that 30% of APR claims are on estates where farming is not the primary economic activity [HM Treasury, 2023, Tax Reliefs Consultation].

For genuine farmers and business owners, however, these reliefs are essential. A typical family farm worth £3 million would owe £1.2 million in IHT without APR, often forcing a sale of the land. Any reform would need to distinguish between genuine trading businesses and investment vehicles—a line that has proven difficult to draw in practice.

FAQ

Q1: Will UK Inheritance Tax actually be abolished in the next five years?

Abolition is unlikely within the next five years. The current Labour government has explicitly ruled out scrapping IHT, focusing instead on closing reliefs for agricultural and business assets. The Conservative Party remains committed to long-term abolition but has not proposed a specific timeline. The OBR forecasts IHT receipts will reach £8.4 billion by 2027/28, making abolition a costly policy that would require either spending cuts or a replacement tax. A more realistic scenario is reform: raising the nil-rate band or simplifying the residence nil-rate band, which would reduce the number of estates caught by the tax without eliminating it entirely.

Q2: How does IHT apply to non-UK domiciled individuals who own UK property?

Since April 2017, all UK residential property owned by a non-dom is within the scope of IHT, regardless of the owner’s domicile or residence status. This means a non-dom living in Dubai, for example, who owns a flat in London, will have that flat’s value included in their estate for IHT purposes. The £325,000 nil-rate band applies, but the residence nil-rate band is only available if the property is left to direct descendants. If the non-dom’s worldwide estate exceeds £325,000, the UK property may trigger an IHT liability of 40% on the excess. Careful trust planning or a change of domicile may mitigate this, but both require professional advice and significant lead time.

Q3: What are the main alternatives to Inheritance Tax if it were abolished?

The two most discussed alternatives are a lifetime gifts tax and an accessions tax. A lifetime gifts tax would tax wealth transfers as they occur, with a typical proposal being 20% on annual gifts above £125,000. This could raise an estimated £4–5 billion per year, less than current IHT. An accessions tax, used in Ireland, taxes the recipient based on their cumulative lifetime inheritance and gifts, with a personal allowance of €335,000 for children. Both systems are more difficult to avoid than the current IHT, as they capture transfers made during life. However, they also introduce new complexity for cross-border families, particularly those with assets in multiple jurisdictions.

References

  • HMRC, 2024, Inheritance Tax Annual Statistics (2023/24 data)
  • Office for Budget Responsibility, 2024, Fiscal Risks Report
  • Institute for Fiscal Studies, 2023, IHT: A Tax on the Wealthy?
  • Resolution Foundation, 2024, Wealth Audit
  • HM Treasury, 2023, Tax Reliefs Statistics (Agricultural and Business Property Relief)