Government considering cuts to inheritance tax, reports say

Prime Minister Rishi Sunak is reportedly drawing up plans to cut inheritance tax with the end goal of scrapping it altogether. 

Under the plans, first reported by The Sunday Times, the most hated tax in Britain could be reduced from 40% as soon as the budget in March. 

Number 10 has not confirmed speculation, but The Sunday Times said there were “live discussions at the highest level of government” about getting rid of the tax.

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But would slashing inheritance tax really prevent estates from being dragged into the IHT net? 

How could the government cut IHT?

Under one of the reported proposals, the Government could announce it intends to phase the tax out by cutting the 40% tax rate in the budget in March while outlining how it will abolish it completely in the future. 

But Downing Street insisted there were no formal plans to cut IHT, adding doing so was “virtually impossible” due to the state of the public finances. 

“Politically, raising IHT thresholds – or even going a step further by abolishing the tax altogether – is likely to be appealing, particularly given we are closing in on a general election,” says Tom Selby, head of retirement policy at AJ Bell. 

“However, IHT has been a reliable cash cow for the Exchequer, generating £2.38 billion in 2009/10 but rising to £6.1 billion last year.”

Who would IHT cuts benefit? 

Inheritance tax receipts totalled £2.6bn between April and July in 2023, and HMRC is due to collect a record amount this year.

New research from Wealth Club suggests the average IHT bill could reach £233,000 in 2023/24, a 9% increase from the current IHT bill. It also expects a 12% rise in the number of estates paying tax. 

But even so, “the overwhelming majority of people will not find their estates subject to IHT”, says Selby. 

“In fact, just 1 in 25 households (4%) are expected to face an IHT bill, according to official estimates,” adds Selby. “However, the longer IHT allowances remain frozen at the current level, the more people will be dragged into paying tax on inherited assets on death.”

IHT is starting to affect increasing numbers of smaller estates, largely due to rising property prices. “So, possibly more welcome would be a hike in the nil-rate band,” says Ian Dyall, head of estate planning at Evelyn Partners. “This exempt allowance below which no IHT is paid has been frozen at £325k per person since April 2009 and would now be close to £500k had it risen with inflation.”

“Given the financial straitjacket wrapped round the chancellor at the moment, he is more likely to opt for a small increase in the IHT allowance than abolishing the tax altogether,” agrees Selby.