19 October 2023

Inheritance Tax: The stealth tax with an uncertain future

Written by Naomi Lamont

While there has been a lot of discussion in the UK media over the last number of months on inheritance tax, both the Conservative party and the Labour party at their annual conferences were very quiet on the subject.

Most people have an opinion one way or another about whether this tax is fair and at what rate it should be paid or indeed whether it should be paid at all. However, what actually is inheritance tax? In this article, I will set out the current inheritance tax position and what the future might hold.

The current position

Since 2009, the amount of assets which a person can own at their date of death (which is technically taxed at zero per cent), is an amount up to £325,000.00 (called the nil rate band). Anything over this threshold is taxed at 40%. This represents the position on death for an unmarried person with no property passing to direct lineal descendants. If someone is married at their date of death, they can leave everything to their spouse free of any inheritance tax. Gifts during lifetime between spouses are also tax free. If a person makes gifts of more than £3,000.00 in a tax year in the 7 years prior to their date of death, the amount of the gift uses up the nil rate band. However, if a person gifts an amount more than the nil rate band but survives the gift by 7 years, then that gift is outside of their estate for inheritance tax purposes.

In addition to the ordinary nil rate band, if a spouse leaves everything or a percentage of their estate to their spouse on first death, their nil rate band (or the unused percentage) transfers to the estate of their spouse on second death. In essence, this means that on the second death of a married couple who have left everything to each other and have made no gifts in the 7 years before they passed away, can have a combined nil rate band and transferable nil rate band of £650,000.00.

In 2017, the UK government introduced a new relief called the residence nil rate band. This is a relief against the value of real properties passing to direct lineal descendants. The current rate is £175,000 per individual. For example, if one parent left their home to their son and daughter, they would have relief of £175,000 to use against the value of the property. The residence nil rate band relief comes off before the ordinary nil rate band in any calculation. The residence nil rate band is also available to transfer between spouses on death. Therefore, if a married couple leave everything to each other on first death, they make no gifts, and their assets include a house, then they could own assets of up to one million pounds before any inheritance tax would need to be paid. Like everything, the residence nil rate band has a number of caveats. It only applies up to the value of a property and cannot be transferred to another asset. It can also only apply in the case of a property passing to direct lineal descendants and therefore an uncle leaving a property to nephews and nieces could not claim this relief.

This is a very basic summary of the main inheritance tax provisions, however, there are a number of caveats and exceptions which should always be considered on a case-by-case basis and indeed tax advice sought.

Changes afoot

There has been a lot of discussion in recent years from both the Office of Tax simplification and the Organisation for Economic Co-Operation and Development about making changes to inheritance tax. These changes relate to how inheritance tax is recorded but there has also been discussion in the media about changing the rate of inheritance tax with some calls to abolish the tax altogether. So what does the future hold for this tax? As noted at the start of this article, the rate of inheritance tax has not changed since 2009. House prices and the values of assets have naturally increased in that period and so a lot more estates now fall into the category where inheritance tax applies making it a very effective stealth tax. Inheritance tax receipts received by HMRC during the financial year 2021 to 2022 were £6.1 billion. This was an increase of 14% (£729 million) on the financial year 2020 to 2021. The current UK chancellor Jeremy Hunt has said that there will be no increase to the nil rate band until 2028 so even more people will fall into the Inheritance Tax bracket. There has been some media speculation that the UK Conservative government may scrap the tax altogether, however, practically this is unlikely to occur immediately.

Next Steps

Our Private Client Team conduct full personal estate planning with clients where we review and explore the estate and personal circumstances of our clients. We then work with other professionals to come up with something of meaningful value for our clients.

If you would like to discuss this matter or any other aspect of estate planning, please contact Neil Bleakley, Andrew Davison or Naomi Lamont.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.

About the author

Naomi Lamont


Naomi Lamont is an Associate in the Private Client team at Carson McDowell. Naomi advises on a number of matters including drafting Wills, estate planning, administration of estates and trusts. She also advises in relation to Enduring Powers of Attorney and controllership applications to the Office of Care and Protection.

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