Will the government abolish IHT in 2024?
Earlier this year, the government was reportedly discussing the abolition of Inheritance Tax (IHT) in the UK – which is catching more and more bereaved families in its net due to the nil rate band threshold freeze in place until 2028.
While only around 4% of deaths resulted in an Inheritance Tax bill in 2020–2021, this is expected to increase to 7% by 2032–2033, affecting 1 in 8 people.
The latest reports suggest that the Conservatives are looking to slash the IHT rate in the Spring Budget next March, which could be a prelude to abolishment – but how likely is this to actually happen, and how might it affect you?
How much is IHT?
If a person or couple passes away and the value of their estate exceeds the tax-free allowance, then Inheritance Tax will be due. The nil-rate threshold has been £325,000 for a single person or £650,000 jointly for a couple in a marriage or civil partnership since 2009.
There is also a residence nil rate which came into effect in 2017, adding a further £175,000 per person to the tax-free allowance for residences directly inherited by the spouse, children, or grandchildren of the deceased person.
However, if the total estate value exceeds the available allowances, beneficiaries will be taxed 40% on the excess value of the deceased’s assets.
Why should IHT be abolished?
Considering that investments in assets, especially property, are typically paid for using taxed income, IHT is like a second tax charge on wealth that has already been taxed.
This is one of the main reasons that IHT is a widely despised tax, with many believing it should be abolished – though the fact that it applies to virtually all assets, with few exemptions, also makes it extremely unpopular.
Though wealthier people are more affected by IHT, they are also more likely to be able to reduce the Inheritance Tax burden for beneficiaries with tax planning measures, such as trusts and lifetime gifts. This may not be possible for moderately wealthy people whose main residence may make up the majority of their estate value.
While abolishing the tax completely is a dramatic move that could lead to increasing tax burdens elsewhere, there are arguments for at least reducing the high 40% tax rate and/or increasing the currently frozen tax-free threshold.
How likely is IHT abolition?
Getting rid of Inheritance Tax could gain the Conservative government some favour ahead of the next General Election, as inflation continues to push more families over frozen tax thresholds during an ongoing cost-of-living crisis.
However, a cut to the tax rate seems more likely than the complete removal of IHT – not least because the lack of revenue from IHT receipts would create a fiscal gap that would need to be filled some other way to keep Britain’s finances on track.
In any case, Inheritance Tax reform is well overdue, so measures such as reducing the levy and reviewing IHT and gift allowances would still be welcome.
We won’t find out about changes to IHT until the next Budget is announced in March 2024, but in the meantime, anyone whose estate is likely to become liable for IHT should look into suitable ways to reduce this liability.
Consult HMRC’s guide to Inheritance Tax on the government website, or speak to a financial adviser like one of our Barnsley accountants, who can assess your financial position and help you with tax planning for the future.