Is Inheritance Tax set to be abolished?

Darren Berry

Darren Berry

Private Client Director

One of the reasons that it’s so important to regularly review your financial plan is that much of the regulation governing the strategy can suddenly change on the whim of a chancellor.

We saw evidence of this earlier this year, when Jeremy Hunt pulled an unexpected rabbit out of the hat by scrapping the pension Lifetime Allowance (LTA) tax charge and pledging to abolish the LTA altogether in the future. You read about the potential benefits of this in a previous edition of The Wire.

Now, The Times has speculated that the government are considering an even more radical measure – the abolition of Inheritance Tax (IHT).

Often called “Britain’s most-hated tax”, IHT receipts have been rising steadily over recent years. Receipts for April 2023 to June 2023 were £2 billion, which is £0.2 billion higher than in the same period a year earlier.

Clearly, the abolition of the tax could have significant implications – especially for wealthier families. Read on to find out why this is on the policy agenda, and what it could mean for you.

A third of people think IHT will affect them

Having lagged behind Labour in the polls for some time, the government are considering the abolition of IHT as a potential flagship manifesto pledge ahead of a general election, likely to take place in 2024.

One of the key reasons that this measure could be a vote-winner is that, while IHT affects less than 4% of the estates in the UK, about a third (31%) of people think that their assets will be enough to attract the tax when they die.

So, if the perception is that IHT will affect many more people than it does, a substantial number of voters might see the planned abolition as a personal benefit.

As a former cabinet minister told The Times: “It is an incredibly unpopular tax in the seats that we need to hold on to at the next election and it is a policy that Labour would have to pledge to reverse.

“Politically it would be a very canny move, because even though most people won’t actually pay Inheritance Tax many people think they will and feel very strongly about it.”

In addition, abolishing the tax could be used as a way to signal political intent without damaging the public finances in the short term.

Making the idea a manifesto pledge means that government won’t have to implement the policy immediately, at a time when the Bank of England would likely see any tax giveaway as an economic stimulus that would almost certainly result in interest rates remaining higher for longer. For many, this would simply negate any positive cut to IHT.

The abolition of IHT would cost around £7 billion a year

As property and asset values have increased in recent years, while the threshold at which IHT becomes payable has been frozen – it’s been at the current level of £325,000 since 2008 – more families have found themselves faced with an IHT bill.

As you can see from the chart below, IHT receipts have been steadily rising, with the Office for Budget Responsibility forecasting that receipts will reach almost £9 billion by the 2027/28 tax year.

Source: Office for Budget Responsibility

Whilst receipts are rising, the number of estates facing a tax charge is still very low. Thanks to the nil-rate band, George Osborne’s “residence nil-rate band”, and the ability for couples to share unused allowances, it’s now possible for children to inherit £1 million without IHT being due.

However, The Times reports that just 5% of voters said the threshold for IHT was £1 million. Most think IHT becomes chargeable at a lower amount.

Moreover, Paul Johnson from the Institute of Fiscal Studies (IFS) says that the wealthier you are, the more likely it is that you can put measures in place to avoid the tax.

“The government’s own Office of Tax Simplification a few years ago put out a report showing that the effective rate of Inheritance Tax on estates of more than £10 million was only half the effective rate on estates of £2 million.

“The reason for that is if you’ve got lots of money outside of the family home it’s really not very hard at all to avoid significant amounts of Inheritance Tax. If, like most of us, most of your wealth is tied up in the family home then it’s really very difficult to avoid.”

A pledge to abolish IHT would put Labour in a tricky position

Whilst a pledge to scrap IHT might work in many “blue wall” seats that the Conservatives need to win at a general election, it also leaves Labour in a tricky position.

The obvious argument that Keir Starmer could make is that it is a move that would only benefit the very wealthy. It’s the same line the party used after the abolition of the LTA tax charge in the spring Budget.

However, more than half the electorate thinks that the tax is either unfair or very unfair. And, ironically, The Telegraph constituency most vehemently opposed to death duties is the west London seat of Hayes and Harlington held by none other than former Labour shadow chancellor, John McDonnell.

Perhaps unsurprisingly, the party has remained tight-lipped on this issue, so it’s hard to predict if they would reverse any pledge to ditch the tax.

The abolition of IHT would make it less complicated to pass on wealth

The rules governing IHT are long and complex. Whilst there are many ways to mitigate the tax – from the use of Business Relief to the “seven-year” rule – these strategies are often not straightforward and need professional guidance.

The obvious benefit of any abolition would be that you could choose to pass on your assets to whomever you liked, at a time of your choosing. There would be no limits on annual gifts, no detailed paperwork to keep about the money you gift from your income and, potentially, no complicated trust structures to set up (although you may still want to consider this from a control perspective).

Considering that government data shows that the average IHT tax bill in London was £279,200 in 2020/21, any move to abolish the tax could have a significant benefit on the amount you can leave to your loved ones.

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