Budget Inheritance Tax Changes
The Government may make inheritance tax changes in the October 2024 Budget
Before the recent general election The Labour Party made a pledge to not increase national insurance, income tax rates or VAT.
This won them votes but has left the new Government's hands tied at a time when they desperately want to raise taxes to plug a £20 billion hole in the public finances - a hole they helped create by agreeing to give public sector workers a generous pay increase.
One tax likely to increase in the October 30th Budget is inheritance tax - perceived by many as a tax on the "rich".
However, thanks to the 17 year freeze in the £325,000 nil rate band, inheritance tax is now a tax faced by the many. In simple terms, the way the tax works is the first £325,000 of your estate is tax free and the rest is taxed at 40%. There is also a £175,000 "residence nil rate band".
The £325,000 nil rate band has remained frozen since April 2009. If it had simply increased with inflation it would be around £600,000 today. Thus the Government has effectively been increasing inheritance tax every year the nil rate band has remained fixed and eroded by inflation.
Perhaps the simplest way to increase inheritance tax in the October Budget would be to keep the freeze in place beyond 5th April 2026 when it is due to expire. Over time it will become less and less valuable and more and more estates will fall into the inheritance tax net. Other inheritance tax changes the Government is rumoured to be looking at include:
- Inheritance tax on pensions. Pension savings generally do not form part of your estate for inheritance tax purposes. Thus your heirs can usually inherit what's left in your pension pot free from IHT. They will probably have to pay income tax on any money they then withdraw...but so too would you! Many wealthier retirees have been encouraged to leave as much of their pension savings intact as possible and focus on using other assets to fund their retirement. Some "expert" think tanks have been encouraging the Government to impose inheritance tax on pensions and we think it's only a matter of time. If it doesn't happen in the October Budget it probably will in the near future. The important point to note is that the Government only has to introduce such a change just before your own death, perhaps many decades from now, for you to be impacted. For this reason we do not think taxpayers should lean on the pensions inheritance tax exemption too heavily.
- The 7 Year Rule. If you give any of your assets away no inheritance tax is due if you survive for more than 7 years. If you only survive for fewer than 7 years some inheritance tax may still be payable but at a rate of less than 40% (see our guide How to Save Inheritance Tax for full details). One inheritance tax change the Government could make in the Budget is make this rule more stingy - for example, change it so you have to live for 10 years.
- Increase the 40% Rate. A simple change would be to increase the rate from, say, 40% to 45% or 50%. A sliding scale could even be introduced, based on the size of your estate, with rates ranging from, say, 30% to over 50%.
- Reduce or Scrap Business Property Relief. This relief allows you to leave your business to your children free from inheritance tax. It was introduced for a good reason, to prevent businesses being broken up to settle IHT bills. However, Rachel Reeves may not see it that way and the relief could be targeted in the October Budget. At present many AIM stocks qualify for Business Property Relief and some wealthier taxpayers go to firms that sell AIM porfolios which are supposed to contain the best companies that qualify for inheritance tax relief. If any changes are made to Business Property Relief in the October Budget we would expect scrapping the AIM exemption to be one of them.
- Scrap CGT uplift on death. When you die the assets you leave your heirs have their capital gains tax bills effectively wiped out. In other words, death is very good for CGT planning purposes. There are press rumours that this is another rule the Chancellor wants to tinker with in the Budget.
In summary, we expect IHT changes in the Budget but, like everyone else, have no clue what those changes will be. I don't want to sound flippant but, to some extent, it doesn't really matter what changes the new Government makes to inheritance tax in the October Budget or over the next few years. All that really matters is what the rules look like when you die. For our younger readers that could be many decades from now. However, for older taxpayers the current IHT rules are a matter of grave concern.
Whatever inheritance tax changes are announced in the October 2024 Budget, we at Taxcafe will give you the lowdown in our plain-English guide How to Save Inheritance Tax.
The information contained in this article is covered in detail in our popular guide:How to Save Inheritance Tax
