Rishi Sunak is reportedly leaning towards scrapping inheritance tax as a manifesto pledge in a bid to win “blue wall” seats in the 2025 election.

Downing Street was said to be discussing whether to make abolishing the levy a commitment.

Conservatives hope to defend constituencies vulnerable to gains from opposition parties.

Supporters argue that the policy could be a “game-changer” in the south of England, as first reported by The Times.

Rishi Sunak made halving inflation by the end of the year one of the five key ambitions for his leadership, and Jeremy Hunt has signalled this target will be prioritised over tax cuts.

The wider economic challenge facing the chancellor and prime minister was illustrated by official figures showing the UK economy contracted in May.

What is Inheritance Tax?

Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died.

There’s normally no Inheritance Tax to pay if either:

  • the value of your estate is below the £325,000 threshold
  • you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club

You may still need to report the estate’s value even if it’s below the threshold.

If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £500,000.

If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die.

Inheritance Tax rates:

The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold.

For example, if your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).

The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will. (The net value is the estate’s total value minus any debts.)

Reliefs and exemptions

Some gifts you give, while you’re alive, may be taxed after your death. Depending on when you gave the gift, ‘taper relief’ might mean the Inheritance Tax charged on the gift is less than 40%.

Other reliefs, such as Business Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill.

Contact the Inheritance Tax and probate helpline about Agricultural Relief if your estate includes a farm or woodland.

Who pays the tax to HMRC?

Funds from your estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). This is done by the person dealing with the estate (called the ‘executor’, if there’s a will).

Your beneficiaries (the people who inherit your estate) do not normally pay tax on things they inherit. They may have related taxes to pay, for example, if they get rental income from a house left to them in a will.

People you give gifts to might have to pay Inheritance Tax, but only if you give away more than £325,000 and die within 7 years.

A No 10 source said: “The PM has repeatedly said that he wants to cut taxes for people.

“As Conservatives that is obvious, we want people to keep more of their own money. But the current economic situation means that Government is completely focused on halving inflation – to help people have more in their pockets at the end of each month.

“This kind of future-scoping speculation just isn’t on his mind at the moment and requires a different kind of economic environment to the one we are operating in.”