HMRC published an updated summary of tax receipts last month, with the data revealing that HMRC collected £3.9 billion in Inheritance Tax (IHT) from April to September 2023, a £400 million increase compared with the same period last year. 

The figures also revealed that total tax receipts are over £23 billion higher than in the same period in 2022. This has sharpened the debate around reforming or even scrapping IHT altogether.

Although the threshold for IHT means that not everyone has to pay the tax, many consider the policy to be unfair. In fact, it has regularly been described as Britain’s ‘most hated tax’. 

However, given the current pressures brought on by ongoing economic difficulties, the question remains whether now, election promises aside, is the right time to embark on IHT reform.

Although the proportion of deaths which lead to an IHT liability is small, this is predicted to grow by approximately seven percent over the next decade. Whilst many other major economies in Europe don’t have IHT, and abolishing the tax would be popular in some quarters, IHT reform should not be taken lightly.

Since IHT receipts are continuing to increase year on year, the Treasury will likely see little reason to cut the tax, never mind scrap it entirely, particularly in this challenging economic climate brought on by inflation and the current level of government debt. Indeed, the Chancellor has been unequivocal in his position that there is no room for further tax cuts at this time. 

Therefore, if IHT were to be scrapped, this would require an increase in other forms of taxation, with Income Tax and Capital Gains Tax (CGT) the likeliest candidates. But raising new revenues via these taxes is a tougher process than simply increasing rates to balance the books.

Is Income Tax untouchable?

Personal tax payments are increasing on all fronts – Income Tax and CGT have risen by 12 percent and 11 percent respectively in the last year. With Income Tax thresholds frozen for the last four years, more people are now liable to increased personal tax payments, due to wage increases and inflation. 

The result is that any further increase in Income Tax rates could end up being economically damaging, due to an adverse impact on taxpayers’ personal finances, reducing their disposable income and accordingly their ability to contribute to the UK’s economic growth.

CGT reform – potential knock-on effect

The CGT rate is considerably lower than Income Tax, though receipts have increased year on year since 2018 and receipts for CGT this year reached almost £17 billion according to the Office for Budget Responsibility. Although increasing the tax rates for owning assets is a sure fire way to boost government revenue, this may have a knock-on effect on taxpayers’ behaviour, reducing their willingness to sell or gift their assets. You don’t need to be a behavioural economist to recognise that people later in life are less likely to be willing to pay increased CGT on the gain on selling an asset, particularly as it will be rebased for CGT on their death. 

The government needs to ensure that a balance is struck between securing funding for their budget and stimulating the economy by encouraging consumer spending. Increasing CGT rates doesn’t seem like the best way to go about maintaining that balance.

Scrapping IHT – a big risk

Is it likely that IHT will be scrapped, with the financial cost of doing so being great in this economic climate? The answer is unclear, nevertheless, that has not stopped the Government from considering the possibility of increasing the Nil Rate Band and/or reducing the tax rate in a pre-Election tax cut promise. Despite the Prime Minister and the Chancellor both refuting the idea of tax cuts, there remains an appetite for cuts to IHT, and perhaps Stamp Duty or Income Tax.

Ultimately, it’s hard to escape the conclusion that any reform to IHT will inevitably have a domino effect on other areas of the UK tax system, which will in turn impact spending patterns across the UK. With public debt spiralling, inflation still a serious cause for concern, and a General Election looming, the conditions simply don’t look right for embarking on significant reforms to tax policy. This is especially true if it means significant tax cuts that the Government has no way of supporting through alternative means.