Chancellor Rachel Reeves is reportedly planning to launch an inheritance tax raid on savers in the Budget, potentially by changing the key thresholds or other reliefs.
Inheritance tax is currently charged at 40 per cent on assets above the main threshold of £325,000 when people die.
But there is further chunky allowance of £175,000 on top if your main home forms part of your estate and you leave it to direct descendants – couples can therefore pass on up to £1million.
One option open to the Chancellor is to merge the two thresholds – known in financial jargon as the nil rate band and residence nil rate band – but cut the overall amount you can leave to loved ones free of inheritance tax
Inheritance tax: Only the richest 4 per cent of families pay it, but more are being dragged into its net
Another persistent rumour is that the Chancellor might include pensions in the assets counted towards inheritance tax.
At present, those inheriting pensions either pay no tax if the holder dies before age 75, or their normal income tax rate – with the money they receive added to their earnings to calculate this – if they are 75 or over.
There are also an array of reliefs that cover gifts, encourage people to invest in start-up businesses and protect family farms, which could all be tinkered with to reap more inheritance tax – often dubbed the ‘most hated’ of all this country’s taxes.
Only the richest 4 per cent of families pay inheritance tax, and there are many ways to plan ahead and help your loved ones avoid the levy.
However, the property boom over recent decades plus frozen thresholds are dragging many more grieving families into the inheritance tax net, and the Treasury has been raking in ever bigger sums as a result.
Meanwhile, there could be harmful knock-on effects from changing some reliefs, which run counter to the Government’s goal of promoting economic growth.
Business property relief offers inheritance tax breaks to those who invest for at least two years in some of the most adventurous and therefore riskiest companies, so a crackdown could hit actual businesses and the AIM market.
You are also currently allowed to pass on property free of inheritance tax if it qualifies for agricultural relief, which is described by the Government as ‘land or pasture that is used to grow crops or to rear animals intensively’.
Wealthy people often invest in farmland to cut their inheritance tax bill as a consequence of this relief, which is meant to protect farmers. However, any raid in this area would also have fallout for farming families.
Sarah Coles, head of personal finance at Hargreaves Lansdown, says reports that inheritance tax exemptions are in the Chancellor’s sights will strike fear into the hearts of one in 10 retired people, who say this is the Budget move they are dreading most.
‘It’s hardly surprising. The fact that so few estates pay inheritance tax owes an enormous amount to these exemptions, so if the Government tweaked some of the big hitters it would be devastating for millions of families.’
She adds: ‘The figures show £15.5 billion was transferred tax-free to spouses and civil partners during 2020/21, which makes it the largest inheritance tax break on the books.
‘If this was changed, instead of the surviving partner being able to give away up to £1million free of inheritance tax, they might be limited to £500,000.
‘The hope is that because this is such an essential exemption, the Government will be wary of making a change that causes potential hardship to so many, and could lead to people being forced to sell their home to pay an inheritance tax bill.’
Hargreaves adds that treating pensions similarly to other savings and investments for inheritance tax purposes would be a blow to anyone planning to pass on their pots to other family members, but would spur people to spend the money or make more gifts while they are still alive.
Rachael Griffin, tax and financial planning expert at Quilter, says most of the annual £7billion revenue from inheritance tax comes from those who are well-off, largely because they have worked hard, saved, and invested diligently.
‘If Labour’s reforms are perceived as a hasty tax grab, they are likely to receive significant backlash. Policymakers should tackle inheritance reform seriously instead of using it as a political tool and revenue generator.
‘For some time, the Labour Party has eyed the reform or even closure of several tax reliefs, such as agricultural and business property relief with a view to potentially removing, capping, or redefining these benefits, which could have the knock-on effect of AIM share losing their inheritance tax break.
‘A move that would seem odd for a government looking to drive growth and investment in UK assets.’
But she adds: ‘If reports are true and Labour opts to make IHT more punitive, it could choose to balance this by modernising gifting laws.
‘Simplifying the inheritance regime and increasing the annual gifting exemption could ease the complexity of transferring assets and help families pass wealth on during their lifetime.’
