In July, the government was reported as holding talks on abolishing inheritance tax (IHT). This wasn’t given much credence at the time, but there are now reports that the March 2024 Budget will include a reduction to the 40% IHT rate as a prelude to future abolishment.
IHT is charged at the rate of 40% on estates worth more than £325,000. However, there is also a further allowance of £175,000 that can be set against the value of a main residence if the property is inherited by descendants. Both allowances are shared between spouses or civil partners, so there is a potential family exemption of £1 million.
Although the combination of frozen allowances and higher property values has brought more estates into the IHT net, the tax is only paid on around 4% of estates.
Argument for change
Given that investments are generally paid for out of taxed income, IHT can be seen as a double charge to tax, preventing people passing on their wealth to children and grandchildren.
- It applies to virtually all assets, without the exemptions given for capital gains tax – such as for a main residence.
- Although IHT is mainly paid by the wealthy, the very rich typically have far more scope for reducing their overall IHT burden by, for example, making lifetime gifts and using trusts.
The moderately wealthy, where a main residence may account for the majority of wealth, may not be able to afford such tax planning measures.
How likely?
In the meantime, if your estate may become liable for IHT, there are measures you can take. HMRC’s basic guide to IHT, including various exemptions, can be found here or you can contact me at derek.hanlan@maco.co.uk for further information and advice.
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