UK Inheritance Tax. Time for change?

In an article published in The Telegraph on the 31st May, a group of prominent MPs, including the former Chancellor of the Exchequer Nadhim Zahawi, voiced their support for eliminating inheritance tax. Zahawi has made a strong statement, denouncing the tax as “morally wrong” and highlighting the anxiety that it can create surrounding the inevitability of death.

These sentiments have ignited a debate on the fairness and necessity of inheritance tax, with proponents arguing for its retention as a means of redistributing wealth and opponents arguing that it unfairly penalizes families already dealing with losing a loved one.

While there is considerable support for the abolition of the tax, it appears unlikely that the government will be able to do so due to its financial constraints. Nevertheless, this scenario could present a valuable opportunity to implement much-needed reforms that have been long overdue and are sure to be well-received.

The imposition of inheritance tax (IHT) has been a subject of controversy among the public, despite its limited impact on a small percentage of the population. According to statistics, only 4% of deaths lead to an IHT liability. That said, this percentage is expected to grow and the revenue from inheritance tax receipts continues to rise year on year. Between April 2022 and February 2023, IHT receipts totalled £7.1billion, up from £5.5 billion in 2021/22. The Office for Budget Responsibility (OBR) has suggested that IHT will raise £7.2billion this financial year and as much as £8.4billion by 2027/28, as a greater number of estates become liable to pay more IHT.

If an individual’s assets upon their passing are valued over £325,000, then their estate will be subject to inheritance tax. However, there is a spousal exemption that can raise this threshold to £650,000. Additionally, there is a residential nil rate band that allows for an extra £175,000 in inheritance tax-free allowance. This can bring the total threshold up to £1 million for married couples who are passing property down to their children. Any remaining assets above these thresholds will be charged a 40% inheritance tax rate.

With the significant increase in house prices, particularly in London and the South East, owning a home has become the most valuable asset for many individuals. However, as a result, an increasing number of people are being affected by the IHT (Inheritance Tax) net.

Surprisingly, tax promises made in the Conservative Party’s election manifestos have not been fulfilled. Despite the rapidly changing economic landscape, the nil-rate band and annual gift limits have remained the same for quite some time. It’s hard to believe that these limits have remained unchanged since 1981 and 2008, respectively, given how much the cost of living has increased over the years.

Individuals who possess a diverse range of assets and a considerable amount of wealth are privileged with the opportunity to undertake legal methods to reduce their IHT liability. Conversely, those whose wealth is primarily dependent on their residential property are presented with limited alternatives. This is why IHT is often frequently referred to as tax which is voluntary, as with planning, it can be avoided, in part or completely.

The concept of eliminating the Inheritance Tax (IHT) is undoubtedly appealing for the masses, regardless of whether or not they are impacted by it firsthand. The notion of being taxed twice, first through income tax during their lifetime and then again after passing away, does not seem equitable to financially savvy people. However, the likelihood of actually getting rid of IHT is exceedingly unlikely.

Updates to IHT – what could change look like?

So, what could any reforms look like? Three areas appear to be ready for change: the headline rate of tax, the nil rate band and gifting exemptions.

The UK’s inheritance tax exemption of £325,000 pales in comparison to the US’s exemption of US$12 million (and US$24 million for couples). It is evident that the UK’s exemption is inadequate when compared to the US.

It would be wise for the Government to consider the current inheritance tax rate, which stands at 40%, one of the highest in the world. Many have lobbied for a simpler tax regime using a flat rate of 25% or even 20% while eliminating many of the available exemptions.

A possible solution to improve tax exemptions would be to raise the nil rate band to £500,000 (and £1 million for married couples). Along with this change, it would be beneficial to eliminate the residential nil rate band. Since it’s introduction, many have commented it is complicated and has limited application. This modification would allow unmarried and childless married couples to qualify for the relief.

Finally, overhauling and reviewing the gifting rules. A starting point would be to bring them in line with the cost of living in 2023. Remember, many of these have not been updated since 1981!

Our team of Partners are here to support, navigate and advise on appropriate IHT planning to mitigate or remove any liability.



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