Quilter has called on the new Government to prioritise reform of Inheritance Tax (IHT) rules. Rachael Griffin, tax and financial planning expert at Quilter, comments.
Following Labour’s victory in the UK election, the focus now shifts to the party’s immediate fiscal agenda. The prevailing sentiment from Labour’s campaign was one of moderation – the ethos was ‘expect the expected’. Labour pledged not to raise the primary revenue-generating taxes – namely income tax, VAT, national insurance, and corporation tax.
But with a mandate for change, the new government is well-positioned to implement significant reforms.
Simplifying IHT and increasing gifting allowances, while potentially reducing immediate IHT revenue, could significantly stimulate economic growth by unlocking capital tied up in estates. While unlikely to be a priority for a Labour government, the released capital could drive increased personal spending, additional investment in UK plc and further job creation, so we could see an IHT review in the longer term prioritising simplification and modernisation.
Simplification could involve consolidating the myriad exemptions and reliefs into a more generous, broad-based exemption or abolishing the residence nil-rate band, which is complex and outdated no longer reflecting the diversity of modern households.
Just simply increasing the annual IHT gifting exemption to over £10,000 would also be beneficial. The current £3,000 limit, unchanged since 1981, needs to be modernised and enhanced gifting allowances would promote more intergenerational wealth transfer, improving financial security for younger generations and enabling them to make significant life investments without the donors worrying about IHT liabilities.
But wholesale simplification of IHT, which doesn’t reduce the amount paid but does reduce the complexity of the tax could also help reduce the administrative burden on HMRC and in turn free up more of its resources. This is essential if Labour is going to achieve its lofty goal of raising over £5 billion annually from closing the tax gap.
The measures announced by Labour thus far may not boost coffers as intended, so they may opt to look elsewhere for easy pickings. Removing the uplift on death for CGT or keeping inheritance tax thresholds frozen, for example, could be a big tax raiser that Labour may lean on if required.
IHT reform in whatever guise is well overdue and should be looked at as a priority.
