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Reeves could turn to IHT exemptions to raise taxes

Mars October 18, 2024

There are reports that inheritance tax exemptions could be reformed in this month’s Budget as the Chancellor seeks tax increase measures.

According to the BBC, the government is considering increasing the amount of money it collects under IHT by changing the exemptions.

A recent study by Hargreaves Lansdown found that one in 20 people said the loss of inheritance tax exemptions was their biggest tax fear in the Budget. This figure rises to one in ten among retirees.

Under current rules, pensions can be exempt from IHT and Helen Morrissey, head of pensions analysis at Hargreaves Lansdown, said the government could remove this exemption altogether or impose a limit on it.

“This would mean it is treated the same as other retirement savings and investments, including Isas,” she explained.

“The government might consider this an easy solution, which is why this rumor has been spread more than once in recent months. The change would be a blow to anyone considering passing on their retirement assets to other family members.

“It would also encourage people to spend their pension during their lifetime, whether by giving their loved ones more gifts or spending more.”

According to figures from HM Revenue & Customs, in 2021-22 a record £5.99 billion was paid in inheritance tax, a rise of £230 million in a year.

Around 4.39 per cent of deaths resulted in an inheritance tax bill – up 0.66 percentage points since 2020-21 and the highest proportion since 2016-17.

There were also 27,800 taxpaying estates, an increase of 800 in one year.

The figures also reveal that £15.5 billion was transferred tax-free to spouses and civil partners in the 2020-2021 period, which Hargreaves Lansdown says makes it the most IHT tax relief largest ever recorded.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said that if this exemption was changed, instead of the surviving partner being able to give up to £1m without inheritance tax, it could be limited to £500,000 .

“We hope that, given this is such an essential exemption, the Government will be reluctant to make a change which would cause potential hardship for so many people and could force people to sell their homes to pay inheritance tax,” she said. said.

Another exemption is the release of professional assets, which protects the assets of family businesses, allowing their transfer free of inheritance tax.

There are also agricultural land reliefs, which apply to all kinds of assets on family farms, allowing them to be passed down from generation to generation.

The combined value of agricultural and commercial property relief was £4.4 billion, an increase of 5 per cent year-on-year.

Coles said: “There has been discussion about whether commercial property relief could become less generous. It could reduce commercial property relief by limiting the assets to which it applies, increasing the minimum holding period (possibly from two years to five years), capping the maximum or reducing the level of relief . However, this could affect investors in qualifying AIM companies, which are currently exempt from inheritance tax after two years.

Zero rate brackets

Rachael Griffin, tax and financial planning expert at Quilter, said changes to IHT had been rumored for years.

The nil rate band allows the first £325,000 of a person’s estate to be IHT free on death.

But she said the zero residency rate band adds significant complexity and is poorly understood.

She explained: “This additional allowance of up to £175,000 per person is subject to a ‘qualifying residential interest’, which basically means ownership of a residential property which has been occupied as a residence at some point .

“While irrelevant to most, heritage property saves huge sums where it applies, often allowing estates to be passed on to the next generation without being dismantled. Certain buildings, land and works of art may be exempt from inheritance tax if they meet strict eligibility conditions, such as exceptional historical, architectural interest or natural beauty.

“If the reports are true and Labor chooses to make IHT more punitive, they could choose to balance this by modernizing the gift laws.

“Simplifying the IHT regime and increasing the annual gift exemption could ease the complexity of transferring assets and help families pass on wealth throughout their lives. Raising the donation threshold would encourage earlier wealth transfer, reduce future IHT liabilities and potentially boost consumer spending.

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Reeves could turn to IHT exemptions to raise taxes

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