At a time of political upheaval, we are fielding plenty of enquiries about the financial landscape, and one question in particular is asked time and time again: will inheritance tax (IHT) be abolished? Here, we explore the potential for IHT abolition and what it means for your finances.
Is inheritance tax changing? The current state of play
In July, the King’s Speech – an occasion which sets out the government’s priorities for the months ahead – contained 39 new bills which ministers want to pass in the next parliamentary session. That’s the highest number since 1995, and the clearest indication yet that Labour intends to effect significant change across a wide range of sectors.
For all that, IHT wasn’t mentioned in the speech. Prior to the general election, Labour hinted at making the IHT system more progressive, perhaps through easing the burden on smaller estates and increasing tax for larger ones. But it’s all very much hypothetical at this stage.
Why might Labour be reluctant to abolish inheritance tax?
Inheritance tax, currently set at 40% on estates over £325,000*, has long been a contentious issue. Critics argue that it unfairly penalises middle-income families, but it is also seen as a necessary tool for wealth redistribution and funding public services.
IHT raises substantial revenue for the Treasury – around £7.5 billion annually. That’s a relatively modest sum compared to other forms of tax, but Labour campaigned for government under the banner of fiscal responsibility. We are consistently being told that there is no magic money tree, so if Labour were to abolish IHT the optics would be poor.
The outright abolition of IHT, therefore, is incredibly unlikely.
Okay – but could Interitance Tax change in other ways? Do I need to be prepared?
Given that Labour would like to increase public spending at a time when the national coffers are looking a bit empty, will they look to increase IHT? We are not in possession of a crystal ball (more’s the pity) – but there are some points worth making.
Firstly, because the tax only raises a relatively modest amount of revenue, and it is very much an optional tax for those who are well-off, any increases will be seen as unfairly squeezing the middle.
We know, too, that Labour deliberately avoided any mention of tax increases during their election campaign.
And finally, it’s important to remember that the point at which IHT can start to kick in (estates of £325,000 or more) has not increased since 2009. This means that more and more people have been subject to IHT due to fiscal drag**, especially as house prices have increased significantly over this time.
So rather than a crude increase in the IHT rate, or a lowering of the estate size to ensure more families fall under the IHT regime, Labour could well take action to reform IHT in other ways. Examples could include
- Simplifying the rules: Making the tax easier to understand could reduce administrative burdens and compliance costs
- Raising the threshold: The tax-free allowance could be adjusted to better reflect current property prices and wealth levels
- Introducing graduated rates: A tiered system might be introduced with higher rates for larger estates, with the aim of making the tax fairer across the board
- Introducing lifetime gifting allowances: Gifting is a way of reducing your future IHT bill. A cap on how much you can give over your lifetime would potentially increase the IHT going into government coffers
- New investment opportunities: Certain investments are inheritance tax-free. Labour have stated their ambitions to grow the UK economy: one way they could do this is by incentivising investment through further IHT investment allowances
Planning for the future
While the complete abolition of inheritance tax seems improbable in the short term, significant reforms could be on the horizon. Staying abreast of these changes and planning accordingly will ensure that you can protect your assets and maximise the wealth you pass on to future generations.
We will continue to monitor the situation, and you can stay informed by signing up to our mailing list. But the best time to act is now. The earlier you take action, the more effective your IHT and wealth transfer planning will be (if you want to know exactly why that is, we’ve written about it in detail here).
A short, complimentary consultation with one of our advisers will help you understand what action you should take. It’s a no-strings opportunity to secure peace of mind.
Book a consultation
*While this is broadly correct, it’s a little more nuanced – we’ve written about the various rules and exemptions here.
**When inflation or income growth moves taxpayers into higher tax brackets. It’s effectively a tax increase without actually changing the tax rates.
Any money invested carries an element of risk and you are not guaranteed to get back the money you invested. This article does not constitute advice and you should consult your financial adviser prior to any action.
