It was reported in July that the government was discussing the possibility of abolishing inheritance tax (IHT), and there are now rumours that the 2024 Spring Budget will include a reduction to the 40% IHT rate, before an ultimate future abolishment.
IHT is currently charged at a rate of 40% on estates worth more than £325,000, with a further £175,000 allowance which can be set against the value of the main residence if the property is inherited by descendants. As both allowances are shared between spouses / civil partners, there is a potential family exemption of £1 million.
Due to this, only around 4% of estates pay the tax, even though a combination of frozen allowances and higher property values has brought more estates into the IHT net.
Why is the change needed?
The common argument is that, given investments are usually paid for out of taxed income, IHT is seen as a double charge to tax, preventing individuals passing on their wealth to any children or grandchildren. This is because:
- IHT applies to virtually all assets, without the exemptions given for capital gains tax e.g., for a main residence
- IHT is mainly paid by the wealthy, but the very rich have far more scope for reducing their overall IHT burden by making lifetime gifts, utilising trusts, plus much more. The moderately wealthy, where a main residence accounts for the majority of the wealth, may not be able to afford similar tax planning
How likely is the abolition of IHT?
Full abolition of IHT is almost certainly going to be too costly to the government in the current climate – a £7 billion loss of annual tax revenue – at a time when HMRC are on course to have a record-breaking year from IHT receipts.
However, a rate reduction of a percentage point or two cannot be ruled out, but whether this will be in the upcoming Spring Budget as reported remains to be seen.
The forthcoming general election also raises questions on the reported IHT reductions, as a Labour government would likely move in the opposite direction and cut IHT allowances, namely the £175,000 main residence allowance.
Get in touch
As we await further confirmation on the future of inheritance tax, if you are concerned your estate may become liable for the tax, there are measures you can take. Get in touch with a member of the PM+M tax team to discuss the tax planning opportunities available to ensure you are paying the right amount of tax, and no more. Email enquiries@pmm.co.uk, and a member of the team will get back to you for a confidential chat.