MHA | Inheritance Tax: Are changes on the Horizon?

Inheritance Tax: Are changes on the Horizon?

Kirsty Foster · February 14th 2024 · read

Grow And Investment For The Future Generation

Mooted changes to Inheritance Tax (IHT) had a reprieve in the Autumn Statement. With an eye to the next general election, the upcoming Spring Budget on 6 March, looks like the Chancellor’s last opportunity in this parliament to make key reforms in this area.

On the face of it, IHT seems to affect very few taxpayers. As we await an update to the full statistics, what we do know from 2020/21 (the most recent information available), is that there were 27,000 estates which paid IHT that year. Around 697,000 estates paid no IHT. Those estates that did pay contributed nearly £6bn. This was an increase of £0.8bn compared to the previous year. Whilst this is a jump in terms of revenue receipts, IHT was payable by just under 4% of estates during 2020/21.1

It seems that this might be changing. Figures released by HM Revenue & Customs (HMRC) in late January show that IHT receipts for the period April to December 2023 were already £5.7bn, a £400m increase on the same period in 2022.

At the same time, taxpayers can be forgiven for feeling that there is a degree of unfairness in this tax. Exemptions and allowances available for estates have barely moved over the past two decades. The main Nil Rate Band (NRB) has remained frozen at £325k since 2009. However, the Residence Nil Rate Band (RNRB) was brought in during that period to uplift the exemption for those passing estates that include a main home to direct descendants to £1m per couple. Whilst welcome for many, this additional relief is curtailed where an estate’s total value exceeds £2m.

By far the most significant reliefs from IHT are the exemption for assets left to a surviving spouse (£15.7bn of bequests in 2020/21) and Business and Agricultural Reliefs (£4.2bn of bequests in 2020/21). Further relief is available for charitable donations made by individuals, both during lifetime and on death, as these are exempt from IHT. There is also a reduction in IHT to 36% for those who leave 10% of their net estate to charity, in their Will.

Is abolition of Inheritance Tax an option?

The wholesale abolition of IHT would make headlines, but it would leave an annual gap of at least £6bn in the public purse, at a time when the International Monetary Fund (IMF) wouldn’t recommend the UK making such tax cuts.

As we’ve already seen from media coverage on the matter, changes to this tax will inevitably lead to more fiscal and political debate. It also seems that fiscal conditions do not lend themselves to tax cuts before the election, nor even in the medium term, with the Chancellor warning that there is less scope than anticipated to do so.

Reform rather than abolish?

That’s not to say that IHT does not need modernising. In the 12 months to November 2023, the average house price in the UK was £285,000, which is not much less than the main NRB. Behind this average lie regional differences, so there will be taxpayers in parts of the country where the value of their home far exceeds this.

Notwithstanding the RNRB, as a combination of increasing house prices and inflation push the values of estates higher, this in turn may mean taxpayers will become more fearful of IHT, than they might have been before. IHT, once seen as a tax on only the very wealthy, may no longer be fit for purpose, but reform together with education for taxpayers may make it so again.

If we are to see reform of IHT rather than a complete abolition, one possibility is for a tightening of IHT Business Relief to fund IHT cuts for others. Business Relief is aimed at avoiding the need to break up businesses to pay IHT when the owner dies, one view being that this is better for overall economic prosperity and therefore of wider public benefit.

However, the relief extends to non-controlling shareholdings in companies listed on the Alternative Investment Market, which are relatively liquid and could often be sold to pay the tax without too much wider economic disruption. Certain 'partly trading / partly investment' business can also qualify and arguably that type of hybrid business gives scope for avoidance.

The potential for change?

Soundbites about the demise of IHT may lead some to put IHT lower down the list of priorities. However, the possibility that IHT reform could instead shift the IHT burden to different groups of people, could lead some to review their finances and seek to pass on assets under what is currently a relatively favourable tax regime for such transfers. Therefore, it may be prudent for taxpayers to review their affairs now, rather than waiting for changes which may, or may not be coming down the track.

Refs:

1:https://www.gov.uk/government/statistics/inheritance-tax-statistics-commentary/inheritance-tax-statistics-commentary#:~:text=The%20key%20points%20from%20this,tax%20year%202019%20to%202020.

2: https://www.ft.com/content/4c173b78-8498-4608-a584-97e5e6288d5c

For more insights on potential measures from the Chancellor in his Spring Budget, view our full Wishlist article

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Read the latest Spring Budget 2024 commentary – visit our dedicated hub
where we will be providing resources, advice and practical guidance on what any new tax measures could mean for you and your business, to help you prepare for and manage their impact.

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