28 September 2022
Latest polling from YouGov highlights that 47% of people think inheritance tax (IHT) is either unfair or very unfair, with seemingly similar views across societal grades and regions of the country. As Mr Kwarteng faces scrutiny for the surprise income tax cut for the highest earners, delivering on Ms Truss’s commitment to reform IHT in the next Budget, this could win round broader public support.
HMRC’s IHT receipts hit £2.9bn between April and August 2022, a £300m increase on the same period last year. The reasons for this increase vary from fiscal drag with frozen allowances and inflation and property supply pressures increasing asset values. Recent statistics show that those living in areas where wages are below the national average are falling within the scope of IHT due to rising property prices. The broadening IHT base is a key area that many believe needs to be reviewed.
Currently IHT is payable at up to 40% on the value of chargeable transfers and death estates above the nil rate band (NRB) of £325,000. An additional residence nil rate band (RNRB), now worth up to £175,000, was introduced in April 2017. The RNRB may only be allocated against the value of a property, that was previously a home of the taxpayer, in the death estate. However, the RNRB is not available in all circumstances due to strict qualifying criteria.
Whilst there have been recommendations in the past for IHT to be scrapped entirely and replaced with a different tax, that seems unlikely given the prime minister has previously committed to ‘no new taxes’.
Whilst the shutters are due to come down at the OTS following the mini-budget announcement, Mr Kwarteng might take inspiration from their IHT review in 2019 which highlighted a complicated regime with various smaller reliefs and exemptions which the public are not aware of and so are underused. Additionally, these allowances have not increased with the consumer or retail price indexes (CPI and RPI) for years (the NRB has not changed for 13 years).
Some of the changes to IHT that Mr Kwarteng could explore in the coming months are as follows:
- replace smaller exemptions with a larger annual allowance. If the values of the smaller exemptions (gifts of £250 per person, £3,000 annual exemption, up to £5,000 for wedding gifts by parents etc) are combined and rebased for CPI/RPI over the years. This combined annual allowance at today’s values would be significantly higher given many of these allowances have remained unchanged for decades. Similarly, the NRB could be uplifted in the region of £100,000 if it were to be increased in line with inflation over the last 13 years. This would take many main homes out of the IHT net;
- the RNRB could be abolished and its inflation adjsted value added to the recalculated NRB;
- remove the main home from IHT completely or introduce a lower IHT rate if the value exceeds the combined NRB and RNRB;
- apply the spouse exemption to cohabitees, perhaps subject to a minimum period of living together; and
- extend Business Property Relief (BPR) to furnished holiday lettings and buy-to-let portfolios which specifically address shortages, such as student accommodation.
There will no doubt be competing demands for further tax cuts and, given the size of the national public debt, it may not be feasible to introduce all of the above changes at once. With the number of taxpayers’ estates falling into the IHT likely to increase further given spiralling property prices in recent years, clarity is needed sooner rather than later on how the chancellor intends to tackle this.