UK Government Considering a Potential Reduction in Inheritance Tax
Prime Minister Rishi Sunak of the United Kingdom is reportedly contemplating plans to decrease inheritance tax (IHT), with the ultimate goal of completely eliminating it. Speculation has arisen that the most unpopular tax in Britain, currently set at 40%, could be reduced as early as the budget announcement in March. While Number 10 has not confirmed these rumors, The Sunday Times has indicated that discussions are taking place at the highest levels of government regarding the abolishment of the tax.
However, the question arises as to whether slashing inheritance tax would truly prevent estates from falling into the IHT net. One proposed plan suggests that the government could announce an intention to phase out the tax, starting with a reduction in the 40% tax rate in the upcoming budget, while providing a roadmap for its complete elimination in the future. Despite this, Downing Street has refuted claims of any formal plans to cut IHT, citing the challenging state of the public finances and deeming such a move virtually impossible.
Tom Selby, the head of retirement policy at AJ Bell, commented that raising IHT thresholds or potentially abolishing the tax entirely may be politically appealing, particularly as a general election looms. However, IHT has consistently proven to be a reliable source of revenue for the Exchequer, generating £2.38 billion in 2009/10 and increasing to £6.1 billion in the previous year.
Recent data from Wealth Club reveals that the average IHT bill could rise to £233,000 in 2023/24, marking a 9% increase compared to the current IHT bill. Additionally, it forecasts a 12% surge in the number of estates required to pay tax. Nevertheless, Selby asserts that the majority of people will not find their estates subject to IHT, highlighting that official estimates indicate only 4% of households are anticipated to face an IHT bill. However, with the current freezing of IHT allowances, more individuals will gradually find themselves liable to pay tax on inherited assets upon death.
IHT has started to impact a growing number of smaller estates, primarily due to the escalating costs of property. Ian Dyall, head of estate planning at Evelyn Partners, suggests that an increase in the nil-rate band—the exempt allowance beneath which no IHT is levied—would be more welcome. Frozen at £325,000 per person since April 2009, the allowance would now approach £500,000 if it had risen in line with inflation.
Considering the financial constraints faced by the Chancellor at present, it is more likely that he will opt for a slight increase in the IHT allowance rather than the complete abolishment of the tax, according to Selby.
