Reforming Inheritance Tax, Institute for Fiscal Studies Report

The Institute for Fiscal Studies recently published a paper titled Reforming Inheritance Tax (the "Report") outlining some interesting issues with the current Inheritance Tax ("IHT") regime.

IHT is commonly regarded as one of the most unpopular forms of taxation. Currently, the revenue generated from this form is taxation is £7 billion a year, however by 2032-33 the IFS expect that this will rise to over £15 billion. Nevertheless, the number of estates which are liable to IHT remains comparatively small. According to the Report less than 4% of estates were subject to IHT in 2020-21 but the IFS expect this to rise to 7% by 2032-33.

The Nil Rate Band (“NRB”), currently at £325,000 in England and Wales, has remained at this amount since 2009, despite the value of residential properties continually rising. Therefore, an individual can pass £325,000 inheritance tax free, but any assets in the estate over this value will be taxed at 40%. This is of course, subject to the application of the Residence Nil Rate Band (“RNRB”) and tapered tax which may be applied to failed Potentially Exempt Transfers, if made more than 3 years before death. The NRB and the RNRB of spouses or civil partners can be combined meaning that on the date of the second death of the surviving spouse or civil partner, £1 million of assets can be passed tax free to direct descendants.

The Report mentioned several issues with the current IHT regime which, they claim, leads to unfairness and inefficiency. The Report notes that IHT does not affect all assets in the same way noting the use of the RNRB, agricultural and business property relief and pensions.

One of the complaints relates specifically to the unfairness with the RNRB. For instance, if an individual dies with assets worth more than £325,000 but their residential property is worth less than £175,000 they cannot use the full RNRB. Considering specifically the disparity in house prices across the country it does seem that the application of the RNRB is inequitable. The Report claims that the RNRB is 'less generous to those living outside London and the South East of England.' Further, the RNRB only benefits those who pass the residential property to their direct descendants. Clearly, if the deceased did not have children or grandchildren then their estate could not benefit this relief. The IFS suggest that that NRB and RNRB should be combined to create larger tax-free amount which does not depend on the assets owned or who they are passed to. This may be welcome change for practitioners and individuals, making dealing with the taxable estate slightly simpler.

Clearly, this suggestion would make the regime fairer and would go some way to take into account the differences in house values across the country. It will be interesting to see whether the Government consider this.

There have been rumours circulating that the Government is exploring changes to the IHT regime ahead of the general election however, the likelihood of a reduction to the IHT rate seems improbable.

Should you wish to obtain advice on Estate Planning, preparing a Will or dealing with the estate of a deceased person please do not hesitate to contact Catherine Pugsley or Laura Southern, who would be more than happy to assist.

Access the Report at Reforming inheritance tax Institute for Fiscal Studies (

The contents of this article do not constitute legal advice and are provided for general information purposes only. The contents are copyright of Lee Bolton Monier-Williams LLP. All rights reserved.