The Future of Inheritance Tax: what Labour’s tax plans could mean for you
Kirsty Foster · Posted on: August 30th 2024 · read
Inheritance Tax (“IHT”) has been somewhat of a political football over the past few years. Prior to the general election earlier this year, plans for reforming, or even abolishing the tax had been mooted by the previous administration. Now that we have a new government in place, it seems that IHT rises could be on the horizon.
Recently released figures for 2021/22, which are the most up to date details available, show that IHT receipts are increasing, reaching close to £6bn per year. 800 more estates were brought into the IHT net during 2021/22, representing an increase of 3% on the prior year. For context, around 634,000 estates paid no IHT at all and only just over 4% of deaths led to IHT being payable, in 2021/22, up from 3.73% in the prior year.
Nevertheless, 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 (£15.5bn of bequests in 2021/22) and Business and Agricultural Reliefs (£4.4bn of bequests in 2021/22). 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.
Can we expect significant changes?
Fiscal change often comes with a new government, and although manifesto pledges mean that the new Chancellor, Rachel Reeves, will likely avoid increasing income taxes where they relate to earnings for workers, there is a £22bn deficit in the public purse which must be addressed.
It’s therefore likely that we can see increases and reform to capital taxes in the Autumn Budget on 30 October 2024.
What changes can we expect?
It’s widely speculated that we can expect to see changes to:
- Business Relief (“BR”) and Agricultural Relief (“AR”) Currently, BR provides relief to shareholders of trading companies, or groups, and other business owners such that no IHT is payable in respect of the value of the business assets, on death or transfer to trust. AR works similarly to ease the IHT burden for farming businesses, to enable succession from one generation to the next. BR, however, also applies to other types of investments, such as shares listed on AIM. Restricting BR such that fewer assets are eligible for 100% relief could increase the IHT take. There could also be a tightening of the rules around AR, to restrict the circumstances where this is available. We could also see closer scrutiny of assets held within businesses and companies, and where these are not strictly used for trading purposes, relief could be denied.
- Capital Gains Tax (“CGT”) probate uplift Where shares, or assets qualifying for BR or AR are inherited on death, these also receive a CGT uplift to market value at the date of death. This means that an individual, or trust can inherit assets where no IHT is payable, and they also benefit from an increased CGT base cost. If the assets, on which no IHT has been paid, are sold shortly after death, then it is often the case that no CGT will be payable either, owing to the higher base cost. It is possible that the Chancellor may restrict this uplift in value to non-business assets, which would usually be subject to IHT, such that it only applies where there’s no corresponding IHT relief.
- Pensions and inheritance Pensions are generally held outside of the estate of the holder, meaning that the value can pass free of IHT on death. The Chancellor could therefore seek to raise additional IHT revenue by including the value of the pension within the estate, potentially subjecting it to IHT at 40%, on death. Currently, where a person holding a pension dies over the age of 75, inheriting beneficiaries are subject to an income tax charge on drawdown of the fund. This doesn’t apply where the death of the pension holder occurs before they are 75. If pension assets are brought within the charge to IHT there is potential for a double tax charge (IHT on death and income tax on drawing the pension) when death occurs after age 75, unless there is a change to remove the income tax charge as part of bringing pensions into the IHT net.
- Trusts Currently, assets up to £325,000 per Settlor can be transferred to trust every 7-years, free of IHT. Beyond this level a lifetime IHT charge of 20% arises. Every 10 years, the trust will also pay a maximum of 6% IHT on assets held within it, beyond the £325,000 threshold. The Chancellor could seek to increase lifetime IHT payable by trusts, by either charging 20% on assets as they are transferred, without taking the nil-rate band into account, or by increasing the periodic charges from 6%, to a higher percentage.
What action should taxpayers take?
The possibility that IHT could be increased or reformed 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 be coming down the track.
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