With rumours the Chancellor is planning cuts to inheritance tax in his Autumn Statement this week and some experts claiming only the very wealthy would benefit, while others argue the potential changes do not go far enough, confusion amongst the public is understandable.
Typically leaks like this, close to the statement and at a time when the Government is way behind Labour in the polls, have more than a grain of truth in them, often having come from someone in the know, hoping to gauge reaction before any announcement is made.
Before we consider the rumours, it’s worth noting the current situation with IHT, which is charged at 40% for estates worth more than £325,000, with an additional allowance of £175,000 towards a main residence. A married couple can share their allowance, which means they can pass £1 million to their children without paying any tax.
The starting threshold has remained unchanged since 2009 while the additional £175,000, known as the nil rate band (NRB), was introduced in 2017 and has not increased since 2021.
Now, depending on where you get your news, you may have heard suggestions that IHT will be cut from 40% to 30%, or as low as 25%, with NRB increased to an as yet unspecified amount. Whilst both scenarios are possible separately or together, they will reduce tax revenues significantly.
The Prime Minister has promised tax cuts now the inflation figures are under control, in a bid to boost his party’s standing ahead of the general election, which is expected in 2024.
However, any changes to IHT will have to be handled carefully, given that only around 5% of estates currently pay IHT and the changes as leaked would appear to only benefit the already wealthy. However, there are suggestions any changes will not be implemented until early next year.
Some commentators are even suggesting that in an attempt to revive the flagging fortunes of the Conservatives, the impacts of a total abolition of IHT is being considered as a manifesto promise ahead of the election battle.
What will change really mean?
With such a large lead in the polls and Labour likely to overturn and perceived tax breaks for the wealthy, whatever IHT changes are announced by the Chancellor will probably only be around until the election is over.
If the nil rate band is increased, it will allow provide more scope for traditional trust planning, since there is currently an immediate 20% IHT charge on any value above the current nil rate band.
Given that trusts will have higher nil rate bands, there are also potential advantages when considering the significance of any 10-year charges in the future. Even a populist Labour Government is unlikely to reverse these outcomes through aggressive retrospective taxation.
An IHT cut would be headline news for wealthy families, but they should defer their celebrations until the result of next year’s election is known and the Conservatives are restored to power – an unlikely outcome given the polls.
After the Chancellor confirms or counters the rumours with his statement, work will be needed to understand how best to ensure the benefits of any changes to IHT are retained, even if the Conservatives are defeated next year as seems likely.
In conclusion, whatever changes are announced, may not take effect immediately, but be implemented in 2024. Changes announced may not take effect at all if Labour win the next election, or they could take effect immediately, but could be undone by Labour if they win the next election.
All of which makes professional advice even more important in the run up to the election and we have an experienced team ready to talk you through the various options available to you – after the Autumn Statement is over and the dust has settled.
