Rumours were rampant of the possible abolition or reduction in the rate of Inheritance Tax (“IHT”) in the Autumn Statement of 2023. As the Conservative government trail in the poles, commentary saw this as a political opportunity to close the gap and bring the disillusioned voters onside. Particularly when taking into consideration the YouGov pole on IHT, which in April 2023 showed that only 16% of people thought that IHT was a “fair” tax.
While some of predictions on the run up to the statement regarding tax were close to the mark, there was one omission which the shadow chancellor of the exchequer, Rachel Reeves, quickly admonished - no reform to IHT.
IHT receipts for April 2023 to October 2023 are £4.6 billion and the Institute for Fiscal Studies confirms that IHT revenues are relatively small (compared to other taxes) at £7 billion a year. However, with the cap on available Nil Rate Band set at £325,000 a year, which is set to last until April 2028, and ever-increasing property values and inherited wealth, revenue from IHT is predicted to rise by 2032-33 to just over £15 billion.
The current IHT tax system in the UK is one of the most complex and unique systems in the world, not to mention that it's not a liability charged to the receiver of the inheritance, but rather the estate. Therefore, it's often more accurately referred to as a “death tax.”
From this complexity arises a system with several flaws. Over the years we've seen the introduction of various reliefs, such as Agricultural Property Relief and Business Property Relief, which were designed to help prop up the economy so that UK businesses and farms are not wound up in order to meet an IHT liability.
A further Residence Nil Rate Band of up to £175,000 for estates under £2 million has been introduced, allowing individuals with a main residence passing to direct descendants to have an allowance of £500,000 on death which is not chargeable to tax. This increases to £1,000,000 for people who are married or in civil partnerships, and who take advantage of the spousal relief.
From this, an inequality arises for those who are unmarried or for those who live in more affluent areas of the country, such as London and the South of England.
Instruction of a tax advisor, coupled with a private client solicitor with expertise in lifetime planning, can make use of these various provisions, resulting in a high value estate having a small or non-existent tax liability. It therefore raises the question that if IHT raises a relatively small amount of revenue compared to other taxes, creates inequality, and can be minimised with viable tax planning, what is the government’s fiscal logic in refusing to reform the system?
Whether, as Rachel Reeve asked, the decision not to reform IHT was a decision “delayed or abandoned” remains to be seen.
Appropriate lifetime planning for your circumstances can see the reduction or removal of an IHT liability on your estate, leaving your business, family and assets protected for the next generation. The private client team at Mills & Reeve can provide their expert advice and experience to continue to help families, business owners and individuals to facilitate effective IHT lifetime planning.
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