Government plans to tackle the fiscal black hole are likely to see inheritance tax (IHT) thresholds frozen until 2028
With the Autumn Statement scheduled for 17 November, the Chancellor Jeremy Hunt is set to freeze inheritance tax thresholds at the current £325,000 for the next six years.
Although only a small percentage of estates pay inheritance tax, it is an unpopular tax. IHT raised £6bn in tax year 2021/22, up from £5.2bn the previous year.
Unsurprisingly freezing the IHT threshold is on the menu for tax cuts; after all, it has not increased since 2008 when it was £312,000. The last increase to the residential nil rate band was in April 2020, when it went up to £175,000.
A recent YouGov poll commissioned by law firm Kingsley Napley LLP shows little support for the government bolstering tax take from IHT, despite the current pressure on public finances.
Two thirds (67%) of respondents to the poll on IHT opposed raising the current 40% rate, with only 16% in favour of a rise. A similar 63% supported raising the £325,000 threshold at which the estate of the deceased is required to pay the tax. However, 48% were in favour of abolishing IHT completely.
James Ward, partner and head of private client at Kingsley Napley LLP, said: ‘IHT is regarded by some as a double taxation given people already pay income tax during their lifetime and is often described as one of the most hated taxes.
‘Our survey results show attitudes on this are clearly not swayed by the current economic situation – a majority would oppose increasing inheritance tax rates and, further, even support the idea of raising the threshold at which IHT kicks in. If the government is tempted to tamper with IHT rules as part of the effort to plug the public finance gap, it may need to think again.’
Rising house prices have contributed to the hike in the number of estates caught by IHT.
Ward added: ‘Decades of house price growth across the UK has meant more and more households have found they fall into the threshold for paying IHT because the nil-rate band has been frozen since 2009. Whilst some have suggested the bands should be reviewed in line with inflation, downward pressure on house prices may go some way to ease the burden on tax payers without the need for regime change.
‘Whatever the future ahead for IHT, those in scope for paying it should take legal advice and ensure they have considered some form of planning.’
Steps lawyers may recommend to reduce IHT liabilities include:
• capital gifting: sizeable transfers seven years before death;
• income gifting: eg, contributing to grandchildren’s school fees or an offspring’s mortgage;
• exemptions: using all nil rate bands. Business relief in particular can lead to big savings;
• life insurance: arranging for this to be paid out to family members (insurance pays the tax);
• SKIing: spending the kids inheritance.