The future of inheritance tax has been a hot political debate in recent years. Before the general election in July this year, there were discussions of a potential reform or even abolishment under the Conservative government. However, following Labour’s landslide victory, IHT increases could be on the horizon.

The latest figures for the 2021/22 tax year show that IHT receipts are on the rise – nearing £6billion annually, with 800 additional estates becoming liable for IHT in that period (a 3% increase on the previous year). In real terms, this means that 634,000 estates paid no IHT at all, with only 4% of deaths resulting in IHT being owed in 2021/22. Will the rumoured changes mean more people are caught by the IHT net?

Wendy Anderson, PM+M partner, explains the current IHT rules, what could change, and most importantly, how you can prepare…

The current IHT rules

Exemptions and allowances for estates have largely remained the same over the past two decades with the main Nil Rate Band (NRB) frozen at £325,000 since 2009. The introduction of the Residence Nil Rate Band (RNRB) has provided some relief, raising the exemption to £1million per couple for estates that include a primary residence passed on to their children, however, the additional relief is reduced when an estate’s value exceeds £2million.

The most significant reliefs continue to be for assets left to a surviving spouse (£15.5 billion in 2021/22) and Business and Agricultural Reliefs (£4.4 billion).

Charitable donations, whether made during a person’s lifetime and at death, are also exempt from IHT. Individuals who leave 10% of their net estate to charity in their will benefit from a reduced IHT rate of 36%.

What could change?

Are major changes on the way? With any new government, there is always potential for fiscal reform, and with a £22billion deficit to be addressed – it is likely that we will see changes to capital taxes, including IHT.

• Business Relief (BR) and Agricultural Relief (AR) – currently, BR lets shareholders in trading companies and business owners avoid paying IHT on the value of their business assets when they are passed on after death or put into a trust. Similarly, AR reduces the IHT burden for farming businesses, making it easier to pass them down through generations. However, BR also covers some investments, like shares listed on AIM. The government could change the rules to limit the types of assets that get full relief, which could increase IHT payments. Stricter criteria for AR could also be introduced, limiting when it can be claimed. There may also be more scrutiny of business assets which aren’t directly involved in trading.

• Capital Gains Tax (CGT) probate uplift – when assets qualifying for BR or AR are inherited, they also benefit from a CGT uplift to their market value at the date of death. This means that beneficiaries inherit assets with no IHT due and an increased CGT base cost. If these assets are sold shortly after death, the higher base cost often results in little to no CGT being payable. The Chancellor may consider limiting this CGT uplift for non-business assets, ensuring that it only applies in cases where there is no corresponding IHT relief.

• Pensions and inheritance – pension assets are typically excluded from an individual’s estate for IHT purposes, meaning the value can pass free of IHT upon death. The Chancellor may consider including pension values in the estate for IHT calculations, which would subject them to a 40% tax at death. Currently, if someone over the age of 75 passes away, their beneficiaries face an income tax charge on pension withdrawals. No such charge applies if the pension holder dies before age 75. If pensions are brought into the IHT net, there is a risk of double taxation—both IHT on death and income tax on pension withdrawals—unless the income tax charge is eliminated as part of the reform.

• Trusts – currently, assets of up to £325,000 can be transferred into a trust every seven years without incurring IHT. For amounts above this threshold, a lifetime IHT charge of 20% applies. Every 10 years, trusts are subject to a maximum 6% IHT charge on assets exceeding the £325,000 threshold. The Chancellor may choose to increase the IHT burden on trusts by either imposing a 20% charge on transfers without considering the nil-rate band, or by raising the periodic charges above 6%.

How can I prepare?

If IHT reforms are announced in the Autumn Budget next month, they could be implemented quickly, potentially affecting your financial plans. The good news is, you still have time to act and take advantage of the current tax reliefs, allowances, and rates before any new rules come into force.

Whether you hold shares, are thinking of gifting assets, or considering setting up a trust, there are strategic steps you can take to protect your wealth from future tax increases. By being proactive now, you can make the most of the benefits that exist under the current framework.

Unsure if you need to act? If you answer ‘yes’ to any of the below questions, we recommend getting in touch and speaking to a PM+M tax adviser to discuss your specific circumstances in more detail.

• Do you hold unquoted trading company shares?
• Do you hold quoted shares?
• Have you previously transferred rental properties into a trust?
• Are you thinking about setting up trusts and transferring assets?
• Are you planning to gift assets to your family?
• Have you used your inheritance tax annual exemptions?
• Do you own land used for agricultural purposes?

This list isn’t exhaustive – if you are concerned about how the upcoming Budget announcements could affect you – we would be happy to arrange a chat to discuss your situation in more detail. Contact Wendy Anderson by clicking the button below.

Stay tuned to the PM+M website and social media channels to keep up to date with the latest Budget news, as and when it happens.