Is a review of Inheritance Tax on the way?

2nd Nov 2023
David J Alexander
Is a review of Inheritance Tax on the way? - D. J. Alexander

In his latest column for The Scotsman, David Alexander delves into inheritance tax: what it is, what might be changing, and the role it could play in the next general election.

It is clear that housing is going to be a key element in the forthcoming general election. With Labour promising 1.5 million new homes over five years and the Conservative party’s strong hints that a review of Inheritance tax (IHT) could be on the cards, the housing market is clearly on the minds of politicians.

While nobody would argue about increasing the number of houses being built (although the announcement is always much easier than the delivery) the issue of IHT is always more contentious. It is often viewed as a policy which would benefit the wealthy while doing little for the ordinary person.

But it should be remembered that IHT starts at £325,000 which is currently less than the average price paid for a property in Edinburgh and East Lothian, and areas like East Renfrewshire and East Dunbartonshire are not far behind breaching this threshold.

When land and buildings tax (LBTT) was introduced (the Scottish version of stamp duty) in 2015 just 3.2% of properties sold for more than £325,000. By September 2023 that figure had risen to 17.9% of all properties.

The IHT threshold has been frozen at £325,000 since 2009 and current policy is for it to remain at that level until 2028 at the earliest. Had the threshold risen by inflation in the intervening years it would, by September 2023, be £495,551. This has had the effect of dragging more and more ordinary homeowners into the tax often without realising this will occur.

The Institute for Fiscal Studies has predicted that the proportion of estates hit by inheritance tax is likely to rise from about 5.5 per cent this year to 7 per cent in 2032-33. Over the same period, government revenues from the tax will rise from £7 billion to £15 billion so there is a substantial amount of money at stake.

While some reported options have been to cut the 40pc rate of inheritance tax (IHT) before phasing it out altogether or perhaps even simplifying the system to allow all families to pass on £1m tax-free it is clear this is a tax which will involve many thousands more estates in the next decade if something is not done. 

IHT is often stated to be the UK’s most hated tax. It is viewed as an attack on savings and on thrift and an assault on families. It is primarily levied on homeownership (where the majority of people have their assets) and the very real desire to try and pass some wealth to the next generation. 

This is money collected from people who may find themselves beyond the tax threshold simply by owning a family home in an area where demand has increased, prices have risen substantially, and the relatively modest £325,000 threshold has been exceeded.

The issue is further complicated because, while the relatives of the ordinary homeowner will be taxed, the wealthier estates will have used lawyers and accountants to ensure that suitable planning is in place. There are many investments that can legally be exempt from IHT while your home – which is obviously impossible to hide – remains a target for a government tax grab. 

It seems wrong that hard working homeowners should be taxed so punitively when those who have the money to buy advice from accountants and lawyers and invest in more liquid assets can avoid IHT through tax shelters and other clever means not available to the ordinary person.

Therefore, in a society where we are encouraged to be homeowners, it seems particularly harsh to then punish those whose wealth is contained within the family home.

Taxing thrift, savings, and aspiration should never be government policy. Taxing consumption makes more sense as it is about choice. Therefore, if the there is a major review of IHT then it will be a welcome announcement for homeowners across the country who feel that they are being unjustly singled out for taxation beyond the grave.