Based on the current rules, inheritance tax will impact more of us than ever before.
The nil rate band has been frozen since 2009 and is set to remain at £325,000 until 2026. An additional residence nil rate band is, in certain circumstances, available in relation to people’s homes.
With the sharp rise in property values meaning many more individuals are now liable for IHT, IHT receipts for April 2022 to August 2022 were £2.9bn, £300mn higher than in the same period of the previous tax year.
IHT is charged at 40 per cent on the value of worldwide assets unless those assets are specifically exempt. This includes your home, any other properties you own, your savings and investments such as Isas, along with cars and personal possessions. The list is extensive and it can quickly add up.
Exempt assets can include pensions savings, assets in many trusts, farmland and qualifying businesses, including some unlisted and AIM listed shares. There are various allowances for different sized gifts and there are also exemptions for overseas assets held by non-domiciles but the rules are complex.
This complexity was highlighted by the Office for Tax Simplification in 2019 and the government decided not to proceed with any major changes.
The former chancellor, Kwasi Kwarteng, announced in the recent "mini" Budget that this office would cease to exist and government would take responsibility for tax simplification, which begs the question: will IHT be revisited again soon? The prime minister has previously indicated that she would like to reform IHT.
While IHT collected £6.1bn for HM Treasury in the last tax year, IHT receipts represent less than 1 per cent of the UK’s total tax take. Polling from YouGov in May 2022 on IHT indicates that 47 per cent of people think it is ‘unfair’ or ‘very unfair’, as many view it as double taxation, given it can apply to income or gains that were already taxed on receipt.
Some commentators have suggested that the government may abolish IHT altogether. In the context of funding the budget deficit, that seems unlikely. There is also the argument that IHT is a necessary means of redistributing wealth through the population.
Given recent announcements it is hard to predict what might happen to IHT. Instead of abolishing it altogether, government could increase thresholds for the nil rate band and residential nil rate band, perhaps in line with house price inflation for the latter.
They could also look to increase the range of assets and businesses that qualify for an exemption or may reduce the period that lifetime gifts may be subject to IHT.