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Will Inheritance Tax top the Chancellor’s Autumn Statement?

20 November 2023


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Calls on the Government to scrap inheritance tax (IHT) are getting louder, but with the Chancellor Jeremy Hunt shortly to deliver his much-anticipated Autumn Statement will inheritance tax be top of his list?

Inheritance tax is a deeply unpopular tax despite affecting just a small group of the population - just 4% of deaths in the UK trigger an IHT liability. It is, by comparison to income tax or corporation tax, expensive to administer and less automated, often requiring documentation to be reviewed manually.

However, with Government finances tight, the revenues it generates are welcomed and increasingly more so. In the 2021/22 tax year, IHT raised £6.1 billion and is predicted to increase to £15 billion annually over the next decade.

Inheritance tax is payable on individual estates valued over £325,000 – the nil rate band – rising to £650,000 for married couples and civil partners. An additional £175,000 is available under the residential nil rate band, raising the IHT threshold to £1m for some married couples passing property to their children. Inheritance tax is then charged at 40% on the remaining estate, subject to reliefs being available.

The Conservative Party has made repeated election manifesto promises to reform the tax, yet it remains, so far, unchanged.

The nil-rate band has remained at £325,000 since 2008 and the annual limit on gifts stuck at £3,000 since 1981. Back then, the average house in the UK could be purchased for £23,000!

Perhaps driving these ever louder calls for the scrapping or reform of IHT has been the continued rise in house prices over the last three decades, which has started to draw more people into the IHT net.

There is also the suggestion that IHT is a ‘voluntary’ tax, where those with a diverse portfolio of assets can undertake perfectly legitimate steps to reduce their exposure to the tax. The Labour Party has already said that if elected to form the next government it will take a long, hard look at Agricultural Property Relief and Business Property Relief, so planning while these are available may be prudent.

Whilst scrapping the tax would undoubtedly be a popular decision, reform is much more likely.

Press reports over the last few days have suggested the Chancellor is considering halving the 40% rate, but what further reforms might he want to consider?

There are, we believe, three areas he might want to consider: the nil rate band, the headline rate, and gifting limits.

Increasing the nil rate band to £500,000 (and £1 million for married couples) would be relatively straightforward. It could be accompanied by the removal of the residential nil rate band which is complex and applies only in certain circumstances. This change could extend the relief to unmarried and childless married couples who cannot currently benefit.

Further reform, and hinted at in the media, the Chancellor should look at the headline rate; at 40% it is currently one of the highest inheritance tax rates in the world. Reducing that rate alongside the removal of many of the exemptions available may simplify matters.

Finally, reviewing and making more generous the gifting rules, bringing them in line with the cost of living in 2023 would be welcomed.

There is, of course, always a risk that in tinkering with the rules the Government may make the IHT regime more complex, which should be avoided at all costs.

For more information, please contact one of our Private Client Services team members.