The Future of Inheritance Tax: Evaluating Abolishment or Reform in light of the Autumn Statement

As we look towards what may be the final Autumn Statement before a general election, we cannot ignore recent speculation of possible changes to Inheritance Tax (“IHT”).

On the face of it, IHT seems to affect very few taxpayers. Statistics from 2020/21 (the most recent available) show 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

Yet there can be an overriding feeling of unfairness when discussing 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. 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?

We’re yet to understand what any change may be, and no decision is expected until 2024. Nevertheless, a complete abolition of IHT would leave an annual gap of at least £6bn in the public purse.

As we’ve already seen from media coverage on the matter, changes to this tax this 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 no scope for immediate tax cuts.²

Should we reform Inheritance Tax rather than abolish?

That’s not to say that IHT does not need modernising. In the 12 months to June 2023, average house prices in the UK were £288,000, 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.

Could this be an area 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