One of the potential tax changes in the forthcoming Budget which has generated media speculation is Inheritance Tax (IHT).
The most recent HMRC statistics show that fewer than 4% of estates were liable for IHT in 2020/21, although this figure can’t be considered a true reflection because it will be impacted by exemptions and relief which essentially defer the IHT charge; for example a husband dies leaving his estate to wife would result in no IHT charge due to spouse exemption. The wife will however pay IHT on husbands’ assets when she dies - so the headline grabber isn’t a genuine fiscal reality.
One thing which can be accurately predicted is more taxpayers will be exposed to IHT due to inflation and the freezing of tax bands.
Aside from rising property prices, one reason for the growing number of estates being caught by IHT is that the nil rate band (NRB) has been frozen at £325,000 since 2009 and is set to remain so until at least 2028. The NRB is a 0% tax band and has remained unaltered for 15 years, so it seems unlikely Rachel Reeves will reduce it, or indeed consider an increase in her Statement.
However, there is an additional residential nil rate band (RNRB) of £175,000 relating to the main residence, which looks slightly more vulnerable to reform. With both NRB and RNRB, a couple can leave up to £1 million without their estate incurring an IHT bill; it’s possible that estates at this level may fall into the ‘broadest shoulders’ category in the eyes of the Chancellor.
I think it is very unlikely that the headline rate of IHT (40%) will change, so aside from potentially reducing or abolishing the RNRB, how else might Mrs Reeves raise extra tax revenue from inheritance taxes?
My opinion is the Chancellor will look at exemptions and reliefs with the view to abolishing some, or more likely making qualifying conditions harder to satisfy. Two reliefs which could well fall into her crosshairs are Agricultural Property Relief and Business Property Relief. Scrapping these two reliefs altogether could raise over £1.4 billion a year - but could severely damage the economy, so it’s a very unlikely move.
More likely will be a tightening up on what qualifies (my agricultural partner colleague Chris Solt has suggested that landowners who have tenanted land could see this treated as an investment asset rather than a farming asset, as it is currently). For both reliefs, we are likely to see a narrowing of the definition of what counts as ‘trading’.
The other possible area where we may see changes is for pensions, which at present generally fall outside of IHT altogether. Given that the Lifetime Allowance no longer exists, the Chancellor may be tempted to put a limit on the size of a pension which can be passed on without a death tax. I don’t see pension funds falling directly within IHT, but rather a new death tax which specifically focuses on pension assets.
IHT is one area where it is more difficult to mitigate any potential Budget measures in advance, as by definition there needs to be a death for any benefit to crystallise. But anyone planning to make gifts (which exceed £3,000 a year) should also be mindful that an extension of the Potentially Exempt Transfer (PET) regime is very possible. It would very easy, and dare I say tempting, for the current seven year survival period for gifts to be extended to say ten years – a very simply measure to legislate and collect revenue from. Join us at our post budget events.