There have been more than a few headlines lately indicating the government could be considering reform or abolition of inheritance tax (IHT), although there has been no “on the record” comment on its future.
IHT has also been conspicuously absent from any recent commentary on Labour’s taxation plans.
The tax was only relevant for around 4% of estates in 2020/21 – a proportion the Institute for Fiscal Studies (IFS) projects will rise to 7% by 2032/22.
Giving up £7.5bn of revenue to benefit such a small – and comparatively wealthy – part of the population would attract negative press
Given that limited impact, it seems unlikely abolition or even reform would be anywhere near the top of Labour’s to-do list.
For both parties, there is also the inescapable fact that, while IHT currently generates only around £7.5bn per annum, it is still £7.5bn that would have to be found somewhere else were the tax to be abolished. The state of the public finances and growing demands on public services leave no real alternative.
Superficially, scrapping IHT could look like a vote winner for the Conservatives at the upcoming general election, with the tax regularly polling as the most hated.
However, giving up £7.5bn of revenue to benefit such a small – and comparatively wealthy – part of the overall population would undoubtedly attract some negative press.
Given the current list of more urgent issues to address, it is difficult to imagine this being anywhere near the top of the agenda
The chancellor has also been vocal about the need to act responsibly with public finances, meaning now might not be the best time to consider cuts for such a small proportion of the voting public.
So, IHT abolition looks unlikely – though, of course, not impossible. We may get more clarity in the upcoming Budget on 6 March.
What could future reform look like?
Plenty has been said about potential reform over the past few years. In 2019 and 2020 alone, there were three lots of suggestions.
The first was from the Office of Tax Simplification. Proposals included the reduction of the seven-year cumulation period to five years, abolition of taper relief, moving to a single “consolidated” annual gift exemption and scrapping tax-free capital gains tax revaluation on death.
Superficially, scrapping IHT could look like a vote winner for the Conservatives at the upcoming general election
None of these ideas were adopted or progressed by the chancellor at the time, Rishi Sunak.
The second came from the All-Party Parliamentary Group for Inheritance and Intergenerational Fairness, which suggested introducing a single annual gift exemption of £30,000, abolishing normal expenditure out of income relief, retaining the nil rate band, abolishing business and agricultural relief and dropping the rate to 10%/20%.
None of these suggestions were adopted either.
The Institute for Public Policy Research also put forward some ideas, proposing a single lifetime cumulative gift allowance of £125,000 and all capital receipts from transfers made during lifetime or one death taxed on the donee as income. The Resolution Foundation has also recently made similar proposals.
None of these suggestions have been adopted.
Most recently, in September, the IFS published a report proposing the following:
- Business relief to be capped or abolished
- Agricultural property relief to be capped or abolished
- Defined contribution pension funds to no longer be IHT-free
- Residence nil-rate band to be abolished
With these changes, the IFS projected that, to remain revenue neutral (i.e. no drop in the IHT yield), the government could afford to:
- Increase the nil-rate band to £525,000 or
- Reduce the IHT rate to 25%
There has been no official comment on these suggestions.
Clearly, there are no shortage of suggestions and options that could be considered, and no one could rule out a future fundamental review of capital taxation reform.
However, given the current list of more urgent issues to address, it is difficult to imagine this being anywhere near the top of the agenda for any political party.
I will be a keeping a close eye out, though.
Tony Wickenden is managing director of Technical Connection
An excellent digest of what is/might/unlikely to, occur, looked at with an expert eye…
There was similar speculation for the last Autumn Statement re IHT – remind me, but was it even mentioned by CofExch.?
There are bigger, more immediate, and wider (net) vote winning fish to fry… after all, abolishing IHT is only going to reinforce solid Tory voters at best.
I do not understand why so many m’learn’d friends are so keen upon total removal of business relief. Certainly, extending the minimum holding period upwards from 2 years, (BR), would probably more reflect the intention of Parliament.
Agricultural is trickier… as I have said in MM before, don’t confuse yield/earnings with asset value. It is difficult to grow crops/rear produce without land – it is not long held farms which push up speculative land development – overages excepted.
Curiously, widely marketed IHT avoidance products, (E.g. Octopus), have not been subject to HMRC scrutiny – aka DOTAS etc – certainly these would become uneconomic if the BR period was lengthened…unless – Eeek – the usuary charges were reduced
I do not believe moving to tax beneficiaries is a starter… many to chase, some non tax payers, many stories to unravel….
All together, IHT IS probably due for a review, I would –
1. Extend BR to 5 years;
2. Maximum acreage on farms vs generations time held;
3. Progressive IHT charged rate(s) from £1M;
4. Restrict AIM allowances;
5. Heavily restrict/remove pension fund status once
NRA has passed – this makes a fair call to recoup
tax which would, otherwise through income tax, have
been collected;
6. Review Trust purposes and outcomes.
Given Labour’s stance upon Resident Non-Doms… I cannot see them becoming ‘class traitors’ by helping the richest 4% anytime soon!!