Will Inheritance Tax be Abolished?
With a general election expected in the second half of 2024, Prime Minister Rishi Sunak is facing mounting pressure from Conservative MPs to announce tax cuts to increase their chances of victory.
Just before the new year, the Telegraph reported that several Conservative MPs are in favour of axing Inheritance Tax (‘IHT’) as part of a general “gear change” on tax and that this change could happen in the Spring Budget (6 March).
The rumours about the abolition of IHT are currently being played down by Government sources on the grounds that they would not put as much money in the pockets of key swing voters.
Nobody can predict what might happen with regards IHT, but in this article we take a brief look at what might happen if IHT were abolished and give our thoughts.
Who would benefit from abolition of IHT?
IHT is only paid by c4% of households and The Institute for Fiscal Studies predicts that 1% of people in the UK would receive almost half of the benefits.
In other words, only the wealthiest in the UK will come out of this change with a positive outcome.
Those in favour of the change have been warned of the backlash from the public as it would focus mainly on tax cuts for the rich rather than helping ordinary families in a time of economic uncertainty.
However, IHT is an unpopular tax; a YouGov survey tells us that 54% of voters considered the tax ‘very unfair’ or ‘unfair. So with a high proportion of people feeling the tax is unfair, the Conservative Party feel that scrapping the tax could give them an advantage in the upcoming election.
Quick recap on IHT
- IHT was first introduced in 1984 and is tax paid on the value of a person’s estate.
- It is paid only when a person’s estate is worth £325,000 or more, with everything above that threshold generally taxed at 40%
- If a person leaves a home to a child or a grandchild, the threshold rises from £325,000 to £500,000.
- In reality, exemption thresholds allow many couples to pass on up to £1 million tax-free where their estates do not exceed £2.35m.
- Charities are exempt from IHT.
In spite of the rumours, we don’t foresee a situation where IHT would be scrapped overnight. A phased abolition, an increase to the threshold (which is currently frozen until 2027-28) or perhaps a reduction to the 40% rate are all options which the government might consider.
Whilst many MPs are in favour of the IHT cut, many are expressing doubts and would rather see other tax cuts such as the higher rate income tax threshold raised, or the basic rate of income tax cut.
It’s worth mentioning here that abolishing IHT would also have a knock-on effect to Capital Gains Tax (CGT). Currently, assets are revalued for CGT purposes on death, so that the recipient gets them at their probate value.
If there was no IHT then presumably there would be no CGT revaluation either, and in that case, IHT charges would be replaced by a CGT charge instead.
Figures released by HMRC this week show that total IHT receipts from April 2023 to December 2023 are £580.8 billion, which is £26.0 billion higher than the same period last year. This would be a significant sum for the government to find elsewhere if it were to be abolished!
Our advice is that rather than listening to speculation and rumours about what may or may not be announced in the run up to the general election, you focus on what the rules are now and make sure that your affairs and finances are in the best shape for your circumstances.
Our team can help you with IHT planning, including:
- Fully utilising existing IHT allowances and reliefs
- Tax efficient structuring of Wills
- Implementing and using trusts
- Using Family Investment Companies (FIC)
- Business Property Relief reviews
Get in touch with Michelle Willson at Michelle.Willson@cowgills.co.uk to find out more about our service and how we can help you.
The information was correct at time of publishing but may now be out of date.