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The answer depends entirely on the size and composition of an estate.
Today, a married couple can potentially pass on up to £1 million without paying Inheritance Tax, thanks to the combined Nil Rate Bands and Residence Nil Rate Bands.
Under a flat 10% levy with no allowances, that same £1 million estate could face a tax bill of £100,000.
Conversely, a family with a £5 million estate might currently face an Inheritance Tax liability approaching £1.6 million after available allowances. Under a simple 10% system, the bill could potentially fall to £500,000.
In other words, smaller estates could be worse off, while larger estates could be significant beneficiaries.
As always with tax reform, the headline rate rarely tells the whole story.
Business owners should be particularly cautious before celebrating.
Many family businesses currently benefit from Business Property Relief (BPR), which can substantially reduce or eliminate Inheritance Tax liabilities.
A trading company worth £5 million may currently pass between generations with little or no IHT exposure if it qualifies for available reliefs. If a flat-rate estate tax were introduced and those reliefs disappeared, the same family could suddenly face a £500,000 tax charge.
This illustrates one of the biggest unknowns. If government reduced the tax rate to 10%, it may decide that generous reliefs are no longer required.
The overall effect would therefore depend not only on the tax rate itself but also on which reliefs survive.
Supporters of the concept argue that a lower tax rate may encourage compliance and reduce the need for complicated planning.
The current system contains numerous exemptions, reliefs, trusts and gifting rules. Those with substantial wealth often spend considerable time and money arranging their affairs to mitigate future tax liabilities.
A simpler system might reduce administration, increase transparency and generate more predictable revenues.
Critics, however, point out that applying a tax to every estate could mean many more families paying tax upon death, including people who currently fall below Inheritance Tax thresholds.
This is perhaps why previous attempts at similar reforms have struggled politically.
At Lexington, our view is simple:
Don’t make planning decisions based on rumours.
Governments frequently float ideas that never become legislation. Even where proposals eventually become law, the detail often looks very different from the initial headlines.
Current Inheritance Tax planning should therefore continue to be based on today’s rules, not tomorrow’s speculation.
For many families, that means considering:
Waiting for tax reforms that may never arrive is rarely a sound planning strategy.
The idea of replacing a 40% inheritance tax with a 10% estate levy has an obvious political attraction. It sounds simpler, potentially fairer and far less punitive for some families.
However, the reality would almost certainly be more complicated.
A lower headline rate does not automatically mean a lower tax bill. Much would depend on the treatment of allowances, pensions, trusts, business assets and agricultural property.
For now, it remains an interesting policy discussion rather than a concrete proposal. But it serves as a useful reminder that tax planning should focus on principles rather than politics. Governments change, budgets change and tax rules change.
A robust financial plan should be able to adapt to all three.
Warren Shute CFP
