Inheritance tax reform: what could this look like?

With the Autumn Statement not far away, there has been a lot of discussion recently about the possibility of an Inheritance Tax reform by the government. This would certainly be a popular move, as although it is expected to raise a mere £7.2 billion this tax year (out of a total government tax take of around £800 billion), it is hard to find a more disliked tax. Since IHT is levied on assets that have already experienced either Income Tax or Capital Gains Tax, it is seen by many as unfair ‘double taxation’.

When Inheritance Tax was introduced in its current form in 1986, it was targeted only at the very wealthy. Due to the long-term freezing of the £325,000 IHT exemption since 2009, which is not expected to rise until 2028, more people than ever are being drawn into paying death duties. In 2022/23, 41,000 people paid this tax which is up sharply from 33,000 in 2021/22, and double the figure of 22,000 individuals in 2018/19. This represents around 6% of all estates and is only expected to increase over time if the current arrangements persist.

There is also the strong possibility of a UK General Election in 2024, which must be held by January 2025 at the absolute latest. With IHT being a political football, there is every possibility that changes to the regime might be made in view of a probable election campaign.

So, what could happen?

No government action

It’s entirely possible that with all the political uncertainty at the moment, the government may decide to take no action at all. This would mean that the status quo prevails and the number of families being drawn into paying IHT will continue to rise each year.

If elected, an incoming Labour government would be caught in a dilemma since UK public finances are in a poor state, and there is little scope for cutting tax at the moment. If the Conservatives win the election, they might be able to kick the issue into the long grass for a while.

Promise reform, but not immediately

This is the kick-the-can-down-the-road option, where reform or change is promised but not in any form that needs to be immediately implemented. This is unlikely, as any such promise would presumably be included in party election manifestos, and hence might as well be implemented immediately in order to have the maximum political benefit.

More generous allowances and exemptions

The Chancellor might opt to unfreeze the annual exemption of £325,000, to increase the amount that individuals can pass on without incurring tax. He might also perhaps opt to combine the standard exemption with the additional £175,000 residence nil rate band and simply give everyone a £500,000 IHT exemption. It would also not be unreasonable to increase the amount that individuals can give away each year without paying any IHT – currently £3,000 – as this has not increased since 1981 and it actually pre-dates IHT in its current form.  If it were to be increased in line with inflation since then, it would now be around £15,000 per annum which would be a much more useful amount.*

There is no clear indication that the government intends to do any of this and it would cut against the previously stated policy of freezing IHT allowances until 2028.

Abolish IHT entirely

The Chancellor could take the truly radical step of abolishing IHT completely. This is perhaps the least likely option, but it is hard to rule it out after the equally surprising abolition of the pensions Lifetime Allowance earlier in 2023.

This would be much simpler than tinkering with allowances and reliefs and would certainly be extremely popular. It would have far-reaching implications for families across the country, and would also profoundly impact other areas like trusts and all manner of IHT planning strategies. If this were to happen. the UK would join Australia, New Zealand, Canada and a number of European countries that have no inheritance tax.

It is not possible to foresee what the government might do in relation to this tax. Much will depend on how the economy performs over the coming weeks and months, and also on the state of the election campaigning. We will continue to monitor and observe the situation very closely.

* Raw data for these calculations comes from the composite price index published by the UK Office for National Statistics (ONS). A composite index is created by combining price data from several different published sources, both official and unofficial. The Consumer Price Index, normally used to compute inflation, has only been tracked since 1988. All inflation calculations after 1988 use the Office for National Statistics’ Consumer Price Index, except for the current year, which is based on The Bank of England’s forecast.

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