Five alternatives to inheritance tax – and what they’d mean for you

Inheritance tax (IHT) raised close to £9bn of revenue in 2025-26 and is set to bring in £14bn by the end of the decade. Yet it’s also hotly debated, with Conservative leader Kemi Badenoch understood to be weighing up abolishing the tax altogether. IHT is a tax on the estate – property, money and possessions of someone who dies. It is currently applied at a rate of 40 per cent on estates exceeding the value of £325,000. Shorts However, there is an extra £175,000 allowance for those who leave their estates to direct descendants, and married couples can pool their half million limits to create an overall allowance of £1m before the tax is charged. Despite only about one in 20 estates currently paying IHT, more are expected to do so in the coming years because the thresholds are frozen, and pensions will be included when a charge is calculated from April 2027. If IHT were abolished, the government would still need to consider how to recoup the billions in tax revenue IHT drums up, with experts suggesting five things that could replace it. Capital gains tax on death Capital gains tax (CGT) is a tax paid on the profit when you sell an asset that has increased in value, such as a second property or shares. Currently, when someone dies and leaves assets to a loved one, these assets are revalued on the date of the death – something termed “CGT uplift on death”. This means any increase in value of the assets during the deceased’s life is effectively wiped out. Experts have suggested one option could be to remove the uplift on death, meaning the deceased’s estate pays CGT on the gains they’ve made, instead of IHT. Let’s take the example of someone inheriting a £500,000 set of shares from a single, unmarried parent. They would currently pay 40 per cent tax on the £175,000 over the £325,000 allowance, so £70,000. But what if IHT is replaced by CGT on death? If the shares were bought for £250,000, then they have grown by £250,000. Depending on what rate of taxpayer the deceased was, they would pay either 18 per cent or 24 per cent CGT on £247,000, as everyone has a tax-free £3,000 CGT allowance. They would pay up to £59,280 as a result. Stuart Adam, senior economist at the Institute for Fiscal Studies think-tank, said regardless of whether IHT was abolished or not, this measure should be introduced. He said current rules encourage people to hold on to the same assets until they die – even if it would be better if they sold the asset and passed on the proceeds instead – to avoid paying CGT. “An example is an elderly business owner who hasn’t actually run their business for years but holds on to ownership until death to escape a CGT charge, rather than selling it to someone who might use it more productively,” Adam explained. However, given how much money IHT brings in, Pete Fairchild, head of private clients at national tax firm Crowe, said it was “highly likely” this measure, if introduced as a replacement, would produce less revenue. He added: “CGT rates are 18 per cent and 24 per cent, so replacing IHT which has a rate of 40 per cent with these lower rates automatically shrinks the revenue pool, unless the total taxable base expands dramatically.” Those inheriting high-value but slow growth assets, like cash, would benefit from this measure. Meanwhile, families inheriting businesses or shares with huge generational growth would be faced with large CGT bills. Receipts-based IHT Currently, with inheritance tax, an estate is taxed before the money is distributed. So if a married couple leave a £1.5m house, a 40 per cent charge is made to the £500,000 over the £1m threshold. That means £200,000 worth of tax is charged. The remaining estate worth £1.3m can then be distributed between heirs – whether there are one, two, three or more. Receipts-based IHT would change this, so that the tax is paid based on how much heirs receive. So with the example of the £1.5m house, if a single heir inherited the house they would pay £200,000 at the current threshold. If two heirs split the property, they’d each received £750,000, which would be below the current threshold – so no tax would be charged. However, in reality, new thresholds and rates would likely be set, and each individual would have a lifetime, tax-free allowance, and any gifts or inheritance above this would be taxed. “This approach is used in a number of other countries and is often seen as fairer because individuals inheriting modest sums would pay little or no tax, while those receiving substantial inheritances would be taxed more,” said Nimesh Shah, CEO of tax firm Blick Rothenberg. How much it would raise would depend on where the thresholds were set. Wealth tax Prime Minister Andy Burnham has already hinted he may have his eyes set on a wealth tax which would see people pay an annual percentage charge levied on their total net wealth over a certain amount. If a 2 per cent wealth tax was introduced and applied to net wealth above £10m, it is estimated it could raise £24bn annually. The losers of such a policy would be the ultra-wealthy, while those on lower and middle incomes would benefit. However, experts argue the policy would create high administrative costs as the government would have to value wealth each year and it would also be difficult to value certain assets like private businesses. Fairchild said: “It carries a substantial risk of capital flight risk where high-net worth people relocate abroad or rearrange their affairs to bring their net wealth below the threshold.” Shah also warned it would be difficult to implement. “Valuing private businesses, property and other illiquid assets on an ongoing basis can be challenging,” he said. Treating inheritance as another form of income This option would see the individual receiving the inheritance being taxed on what they receive at income tax rates. For example, if income tax rates were applied to inherited money, anything over the £12,570 income tax allowance would be subject to income tax with the amount you pay depending on what other sources of income you have. As an example, if you inherited £50,000 and earned £40,000, then you would pay income tax that year as if you had earned £90,000. Under current rates you’d pay 20 per cent income tax on the amount earned between £12,570 and £50,270, and 40 per cent on the remainder. In total you’d pay £23,432 in income tax. A downside of this is it would cause people who are inheriting modest amounts to be subject to tax, unlike with the current system. Adam from the IFS highlighted there was also the option to continue to have a large tax-free allowance and only apply income tax rates to inherited money above that. He added: “A more radical approach would be to apply the tax to gifts received during a person’s life rather than just at (or shortly before) death.” Increase taxes or cut spending elsewhere A Tory government could choose to abolish all capital taxes like IHT and CGT and find the money in extra income tax, national insurance contributions or VAT, or by cutting spending. Who would lose out if this measure were introduced would depend on which other taxes were raised, in what way and by how much. Adam said he did not get the impression the Tories were looking to increase other taxes to pay for abolishing IHT. Instead, he thought they would be looking for net tax cuts, presumably either spending cuts or more borrowing. However, Arun Advani, director of CenTax was sceptical of this approach. “All parties have a habit of announcing plans to cut things and not being able to deliver,” he said.