With HM Revenue & Customs raking in a further £0.7 billion in inheritance tax in April 2024, up £85 million on the same period of last year, what appetite might there be for potential changes to IHT rules pre or post the general election?
The sharp rise in IHT receipts since March 2022 was attributed to a combination of higher volumes of wealth transfers following recent IHT-liable deaths, rises in asset values and the Government’s decision to freeze IHT thresholds until 2028.
It is expected that more families will be affected in the future, with the number of deaths resulting in IHT predicted to rise to 6.3% by 2028-29, the highest level since the 1970s, according to the Office for Budget Responsibility.
With a general election on the horizon, there is growing speculation around whether the leading political parties will address IHT in a bid to gain votes.
Shaun Moore, tax and financial planning expert at Quilter, said: “As we enter into election season, it would be sensible for either party to reassess the UK’s IHT landscape and change what is no longer fit for purpose.”
Moore said some of the measures that could help to alleviate the tax burden could be to drop the IHT tax rate to 30% but said such a tax cut is unlikely to be “too much of a vote winner” given that IHT only affects a small percentage of people. However, Moore said there are opportunities to improve the inheritance tax system to tackle some of the complexities and inequalities.
“One area ripe for reform is the Residence Nil Rate Band. While a well-meaning policy it is fiendishly complicated and excludes a significant demographic, especially the growing number of elderly individuals with children. A fairer and less complicated system would be to raise the nil rate band to £500,000. This would be better aligned with the changing demographics and social structures of the country.
“Similarly, increasing the annual gifting allowance from £3,000 would help to improve the intergenerational wealth inequality as more people would be incentivised to gift larger sums of money during their lifetime. The gifting allowance has been stuck in time for decades and needs to be looked at as a matter of urgency.”
However, with IHT continuing to generate vast sums of income for the Treasury, combined with the state of public finances, the Conservative Party is unlikely to abolish or reduce the tax. Conversely, the Labour government could pursue a hardening of the rules which could see more families dragged into the net.
Laura Hayward, tax partner at Evelyn Partners, said: “The IMF suggested that the Chancellor should raise inheritance tax by broadening its base. The message is unlikely to gain much traction in the current Government; the last time IHT was making policy news was when speculation had it being cut or even abolished at the Autumn Statement. But a hawkish sentiment on IHT could find more receptive ears should there be a change of Government.
“Even if thresholds and rates just remain frozen, the IHT net will be cast much wider and draw in families across the UK with fairly modest levels of wealth in real terms.”
