What is inheritance tax? Rishi Sunak plans to abolish controversial levy before election - threshold explained

Rishi Sunak will reportedly scrap inheritance tax in the Spring Budget as part of a giveaway to voters ahead of next year's election.

The Daily Telegraph reports the PM is considering abolishing the levy, described as Britain's most hated tax, as well as increasing the 40% income tax threshold and lowering the basic 20% rate. However, axing inheritance tax is unlikely to be matched by Labour - with the opposition describing it as a "unfunded tax cut for millionaires" - so Sunak believes this could create a dividing line. Experts say that "abolishing it or scaling it back would mean either cutting such services, raising other taxes or increasing the national debt".

Only about 4% of deaths in 2020-21 resulted in inheritance tax being paid, with exemptions allowing many couples to pass on up to £1 million tax-free, however it has become a totemic issue for the Tory right. Reports ahead of the Autumn Statement claimed this was being considered, however it failed to materialise. Sunak may feel he now has more fiscal headroom to abolish inheritance tax.

Polling by More In Common found three in five Britons think it should be abolished or the tax-free threshold should be increased, even when told that hardly anyone is affected by it. Focus group respondents said it was unfair to tax things twice when people were passing something on to their relatives.

What is inheritance tax?

Inheritance tax is a levy on the "estate" of someone who has died, which includes their property, money and possessions. Only about one in 25 families have to pay it, according to Money Saving Expert, and there's no tax to pay if you leave something to a spouse, civil partner, charity or amateur sports club. It has been described as the "most hated tax in Britain" as on certain things you're essentially paying tax twice, and has long been a big issue for the Conservative Party and their voters.

What is the inheritance tax threshold?

Inheritance tax thresholds are slightly complicated, however at a starting point there's no tax to pay if the value of the estate is below £325,000 or everything above £325,000 is given to a spouse, civil partner, charity or amateur sports team. Anything above the £325,000 threshold will be taxed at 40% (or at 36% if you leave 10% of your will to charity).

There are a number of additional tax breaks beyond the initial £325K threshold:

• If your overall estate is worth less than £2million and you leave your main residence to your children or grandchildren, you get an additional £175,000 which you don't need to pay tax on. This means inheritance tax won't need to be paid on the first £500,000 of your estate. (There are certain caveats to this which can be found here).
• If you leave your estate to your spouse, and therefore pay no inheritance tax, when they die and pass it on they get your tax-free allowance. So that means a couple can effectively not pay inheritance tax on £1million worth of assets (two tax-free £325,000 allowances and two £175,000 housing allowances).

What do experts say about scrapping inheritance tax?

Experts at the Institute for Fiscal Studies say that the wealthiest 1% of the UK would get half the benefit of axing inheritance tax, receiving an average tax cut of £1million. Each generation of older people is holding more and more wealth, and this is becoming increasingly beneficial to their relatives when buying houses and entrenching inequality.

While the IFS believes inheritance tax needs to be reformed, it says abolishing it would come with a significant fiscal cost that will only increase over time. Research fellow Arun Advani said: "While inheritances and therefore inheritance tax revenues are set to grow, inheritance tax remains small and comes too little too late to reduce inequalities between those with the wealthiest parents and the rest. While it’s conceivable that a more expansive inheritance tax could be introduced, those concerned with social mobility need to look earlier in life than when parents die."

While Mark Franks, director of welfare at the Nuffield Foundation, said: "Inheritance tax is paid after death and by only a small proportion of the population, who are largely the wealthiest members of society. Like all taxes, it supports vital public services.

"Abolishing it or scaling it back would mean either cutting such services, raising other taxes or increasing the national debt. Yet, the current design of inheritance tax compromises both confidence in it and its ability to generate revenue effectively. Through practical reforms, it is possible to craft a more just and efficient system."

What has Labour said?

Labour has described the proposals as an "unfunded tax cut for millionaires". James Murray, the Shadow Financial Secretary to the Treasury, commented: “This is a desperate briefing from a desperate prime minister who is spending his Christmas break trying to keep Tory MPs on side.

"There have been 25 Tory tax rises since the last election. Now at a time when families across Britain are struggling with the cost of living and our NHS is on its knees, Rishi Sunak is trying to buy off his backbenchers with an unfunded tax cut for millionaires. The Conservatives are out of touch and out of time. It’s time for change with Labour.”

While Labour Mayor for Greater Manchester Andy Burnham has said he would like inheritance tax to be replaced with a wider social care levy, to fund a national care system.

Ralph Blackburn is NationalWorld’s politics editor based in Westminster, where he gets special access to Parliament, MPs and government briefings. If you liked this article you can follow Ralph on X (Twitter) here and sign up to his free weekly newsletter Politics Uncovered, which brings you the latest analysis and gossip from Westminster every Sunday morning.