18 October 2024
If you are covering reports that the government is planning to increase the amount of money it raises in inheritance tax at the Budget, please find commentary below from Rachael Griffin, tax and financial planning expert at Quilter:
"Inheritance tax (IHT) is one of the most hated taxes in Britain, often viewed as unfair. The super-rich tend to avoid it by hiring tax advisers to navigate the complex web of reliefs and exemptions. Consequently, the majority of the annual £7bn revenue comes from those who are well-off, but largely because they have worked hard, saved, and invested diligently throughout their lives.
“For many, IHT is an emotive issue. Frozen thresholds mean that a growing number of taxpayers have found themselves caught in a whirlpool of ever-evolving tax codes and regulations. In reality, IHT has been ripe for reform and simplification for years, as it is full of impenetrable and irrelevant details that need to be reviewed.
“We must hope that any reforms from Labour will tackle these issues rather than simply opting for a quick tax grab by lowering the £325,000 nil rate band. The Conservative Party, under Rishi Sunak, flirted with the idea of reducing, if not abolishing, IHT to woo voters. If Labour’s reforms are perceived as a hasty tax grab, they are likely to receive significant backlash. Policymakers should tackle IHT reform seriously instead of using it as a political tool and revenue generator.
“For some time, the Labour Party has eyed the reform or even closure of several tax reliefs, such as agricultural and business property relief with a view to potentially removing, capping, or redefining these benefits, which could have the knock-on effect of AIM share losing their inheritance tax break. A move that would seem odd for a government looking to drive growth and investment in UK assets.
“The long-standing nil rate band is one of the most valuable features of UK IHT legislation, meaning the first £325,000 of someone’s estate is free of IHT upon death. However, the residence nil rate band (RNRB), an innovation of George Osborne, adds significant complexity and is poorly understood. This incremental allowance of up to £175,000 per person is subject to a ‘qualifying residential interest,’ which broadly means ownership of a residential property that has been occupied as a residence at some point.
“Although irrelevant for most, heritage property saves huge amounts where it applies, often allowing estates to be passed on to the next generation without being broken up. Some buildings, land, and works of art can be exempt from inheritance tax if they meet strict qualifying conditions, such as being of outstanding historical, architectural interest, or natural beauty.
“If reports are true and Labour opts to make IHT more punitive, it could choose to balance this by modernising gifting laws. Simplifying the IHT regime and increasing the annual gifting exemption could ease the complexity of transferring assets and help families pass wealth on during their lifetime. Raising the gifting threshold would encourage earlier wealth transfer, reducing future IHT liabilities, and potentially boosting consumer spending."
