‘Inheritance Tax Premier League’: is reform on the cards?

An ‘Inheritance Tax Premier League’ table, prepared by leading law firm Kingsley Napley, has ranked where people pay the most inheritance tax (IHT) by local authority. The firm has analysed the latest available HMRC statistics (for tax year 2019-20).

With Liz Truss’s home borough of Greenwich barely making the top 100 of local authorities’ contributions to government coffers for inheritance tax, IHT may not be high on her neighbours’ agendas, but according to James Ward, head of private client at Kingsley Napley LLP, residents in other boroughs would be foolish to wish for the abolition of IHT any time soon.

Kensington and Chelsea topped the table for average value of IHT paid (see table 1 below) and Barnet once more leads by volume of estates hit by IHT (see table 2). It was revealed eight of the ten highest paying localities for IHT are in London and the South East, with Newcastle and Suffolk being the only exceptions (table 1).

Currently, the IHT threshold is £325,000, meaning people who inherit estates over this amount are required to pay tax at 40 per cent. The total IHT take for the tax year 2019-20 was £5.2bn. For the financial year 2021-22, the total was £6.1bn.

During her leadership bid in the summer, Truss promised a review of inheritance tax if she became prime minister. One of the major donors to Truss’s campaign, treasury minister Andrew Spencer, even called for the tax to be completely scrapped earlier this month (October). However, given property prices are falling, and new chancellor Jeremy Hunt has warned some taxes may need to go up, there is now a chance IHT reform may be in his sights to achieve the same tax take or increase it in future.   

“Decades of house price growth across the UK have taken more and more estates into the threshold for IHT, with London and the South East paying 47% of IHT receipts according to the latest available figures. But any proposal to eliminate IHT at this point in the economic cycle would surely be as unpopular and unwise as the 45p income tax fiasco,” said Ward.

“Whether the new Chancellor decides to tamper with the current regime or not, those whose estates will be liable for IHT should double down on their planning.

“At least with IHT it’s a case of better the devil you know. Many of the clients I speak to take the view that abolishing it entirely would only enhance the prospect of a wealth tax under an incoming Labour Government.  IHT remains a tax where planning is possible to mitigate liabilities due,” added Ward.

The firm said it sees a steady stream of enquiries from those who want to take legitimate steps to reduce their inheritance tax liabilities. Such steps might include:

• Capital gifting: sizeable transfers seven years before death;
• Income gifting: Regular contributions to grandchildren’s school fees or an offspring’s mortgage for example;
• Exemptions: Using all nil rate bands. Business relief in particular can lead to big savings;
• Life insurance: Arranging for this to be paid out to family members (so letting the insurance pay the tax);
• Skiing: Spending the Kids Inheritance. 

Ward concluded: "Those living in IHT hotspots should strongly consider all of these steps and more to avoid ranking at the top of our Inheritance Tax Premier League in future. It is always wise to have a regular review of estates and inheritance plans to ensure tax-efficiency in the event of death but especially now given the current political and economic environment.”

Table 1: Rank by Value of IHT Estates – 2019/20 tax year (with 2018/19 table for comparison)

Table 2: Rank by Number of IHT Estates – 2019/20 tax year (with 2018/19 table for comparison)

The Kingsley Napley 'Inheritance Tax Premier League' analysis can be found in full here.