The Conservatives are reportedly considering whether to abolish Inheritance Tax ("IHT") as part of their manifesto for the next general election.
What is IHT?
IHT is a levy charged on :-
- Death of an individual;
- Gifts made within seven years of death; and
- Certain lifetime transfers into trust.
Each person has an allowance of £325,000 (the "nil rate band"). Subject to a number of qualifications, those who bequeath residential property to their children (or other direct descendants) benefit from an additional threshold – currently £175,000 ("the residence nil rate band") – bringing the combined allowance to £500,000 in many cases. Over and above these thresholds, assets are liable to IHT at a rate of 40%.
Assets passing to a surviving spouse are exempt from IHT. First death nil rate bands, if not used, are transferable and can be utilised on second death. Therefore, married couples and civil partners with children can have an IHT allowance of up to £1million. Reliefs are available on certain business and agricultural assets, and bequests to charities and some other organisations are exempt. Individuals who leave 10% or more of the value of their estate to charity pay a reduced IHT rate of 36%.
Should IHT be abolished?
IHT is an emotive tax, and one which can divide opinion. Some view it as a burden unfairly shared – a further tax on wealth which, in many cases, has already been subject to other taxes such as Income Tax, Capital Gains Tax, and previous IHT charges.
Scrapping IHT would make for significant savings for families otherwise affected. It would also equalise the treatment of people with and without children – current IHT allowances being significantly higher for those with children and residential property. It may encourage people who might otherwise leave the UK and acquire an overseas domicile to stay, save and invest in this jurisdiction.
That said, IHT is forecast to generate revenue of £7.2billion this tax year – rising to £8.4billion by 2027/28. Although most estates are not liable to IHT, total abolition would leave a substantial gap in government finances. This could give rise to other tax ramifications, e.g., a rise in other taxes, changes to tax treatment on gifts, applying Capital Gains Tax on death or some other form of wealth tax. It could also pave the way for an entirely new taxation system and could have an adverse effect on legacy income paid to charities. An alternative to abolition might be taxing more estates at a lower rate.
So, should I progress planning?
If, based on recent press, you are questioning whether to invest your time and money on estate planning advice, then you are not alone. The current IHT regime is not perfect, however it is likely that the goal posts will continue to move as time goes on. While abolition may be a possibility, so might a change of Government altogether that sets out to strengthen IHT.
Whatever happens, it will not devalue planning or the importance of having a suitable will in place. Estate planning involves many considerations and effective, professional advice can ensure that your intentions are adhered to in the most efficient way – whether or not IHT is on the horizon.
While it may be tempting to adopt a 'wait and see' attitude, we would urge you not to let uncertainty regarding IHT deter you from taking proactive steps to safeguard your assets for your loved ones.