The Conservative Party is looking to make inheritance tax a battleground in the upcoming election, with plans to abolish it likely to be a manifesto pledge. It is the latest in a series of plans to reform the controversial tax to make it fairer and more progressive.
As it stands, inheritance tax is paid by relatively few estates – only around one in 201. However, it is increasingly profitable for the Government as rising house prices bring more people into its thresholds. Recent figures show that inheritance tax raised £2 billion from April to June 20232. This is £200 million higher than in the same period the previous year and puts HMRC on track to raise almost £8 billion in the 2023-24 tax year.
Previously proposed inheritance tax changes
There have been efforts to reform it in the past. In 2020, the All Party Parliamentary Committee proposed a flat rate inheritance charge of 10%, with the abolition of all tax allowances except between husbands, wives and civil partners, and for charities3. It also proposed the abolition of the capital gains tax uplift on death, whereby any capital gains on existing assets are effectively wiped out.
The Resolution Foundation has suggested abolishing inheritance tax and replacing it with a lifetime receipts tax, paid by the beneficiary. In this system, each person would have a lifetime allowance of £125,0004. For any receipts over this threshold, there would be a progressive taxation rate, starting at 20%, with a higher rate of 30% on receipts exceeding £500,000. Transfers between husbands, wives and civil partners would be exempt and existing reliefs such as business relief and agricultural relief would be tightened up, reducing the scope for tax avoidance. It claims the tax would raise more, and be more evenly distributed.
The Office of Tax Simplification has also submitted proposals. It suggested reducing the current 7 year inheritance tax rule (after which a gift becomes exempt from inheritance tax) to five years to reduce the complexity and confusion around gifting, along with other proposals for the removal of the capital gains tax uplift, and reform of business relief5.
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Inheritance tax and the UK economy
For those trying to minimise inheritance tax for their heirs, these various proposals can be troubling. Why look to plan when the system might change with a new government? However, it is worth noting that governments of every colour have resisted any reform to date. The only significant change to inheritance tax has been the introduction of the property nil rate band, which exempted a share of residential property for family members.
On the latest proposals to scrap inheritance tax, the government has said it is not an immediate priority and ‘requires a different kind of economic environment to the one we're operating in’1. It is clear that any significant change would require an improvement in the UK economy, which is not imminent. Equally, the Labour Party has not raised inheritance tax as an issue ahead of the election. Ultimately, it is difficult for any government to abandon £8 billion of revenues at a time of straightened finances.
Avoiding inheritance tax
Although many people ask the question ‘how to avoid inheritance tax’, it’s important to say that, for many people, it cannot be completely averted but with effective estate planning, it can be mitigated and managed.
We cannot be certain of future changes, so people have to work within the framework that exists today. Flexible estate planning can accommodate changes of policy. Significant tax changes are usually introduced progressively and well-flagged in advance. As such, we believe that all the usual ‘good housekeeping’ on inheritance tax – using the annual gift allowance, making a Will, making regular gifts out of income – should still be considered by anyone facing an inheritance tax bill.
Trusts can still be a useful tool when planning for wealth transfers. In particular, they can be a means to allow some control over assets, while exempting any future growth in those assets from inheritance tax. This can be useful for people who are worried about later life care, for example. Equally, for those who have left inheritance tax planning late, a carefully-managed AIM portfolio, or a portfolio that qualifies for business relief can be a tool to minimise the liability. Please note that investments used for business relief are higher risk and investors can may get back less than invested. Advice should be sought before considering this option.
Speak to Evelyn Partners about inheritance tax
Inheritance tax is always likely to be a political football. Future governments may seize the initiative for reform, but there appears little appetite for it today. In the meantime, people need to plan, helping to create certainty for their heirs. Evelyn Partners advisers can help you navigate the complexities of the inheritance tax system as it exists today, and if it changes in future. To find out more, book a free consultation with one of our experts online or by calling 020 7189 2400.
The value of investments, and the income from them, may go down as well as up and investors may not get back the amount originally invested.
Prevailing tax rates and reliefs depend on individual circumstances and are subject to change
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
1. Sky News, Inheritance tax guide: The rules now and why the Tories might scrap it, 2023
2. Gov UK, HMRC tax receipts and National Insurance contributions for the UK, 2023
4. Resolution Foundation, Passing on: options for reforming inheritance taxation, 2018
5. Gov UK, OTS Inheritance Tax review: Simplifying the design of the tax, 2019