Opinion: What could happen to inheritance tax in the Budget?

It has been widely speculated that Rachel Reeves could introduce several changes to inheritance tax (IHT) in the forthcoming Budget. 

The most recent HMRC statistics show that fewer than 4pc of estates were liable for IHT in 2020/21. However, this figure cannot be considered a true reflection because it will be impacted by exemptions and relief which essentially defer the IHT charge. 

For example, if a husband dies leaving his estate to his wife it would result in no IHT charge due to spouse exemption. But the wife's beneficiaries will still pay IHT on her husband's assets when she dies.

One thing which can be accurately predicted is that more taxpayers will be exposed to IHT due to inflation and the freezing of tax bands.

Kevin Bunting, managing partner at Lovewell Blake (Image: Supplied) Aside from rising property prices, one reason for the growing number of estates being caught by IHT is that the nil rate band (NRB) has been frozen at £325,000 since 2009 and is set to remain so until at least 2028. 

The NRB is a tax-free inheritance tax allowance and has remained unaltered at 0pc for 15 years. So it seems unlikely Mrs Reeves will reduce it, or indeed consider an increase in her statement.

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There is, however, an additional residential nil rate band (RNRB) of £175,000 relating to the main residence which looks slightly more vulnerable to reform.

With both NRB and RNRB, a couple can leave up to £1m without their estate incurring an IHT bill. It’s possible that estates at this level may fall into the ‘broadest shoulders’ category in the eyes of the chancellor, able to withstand the heavier financial burdens. 

I think it is very unlikely that the headline rate of IHT (40pc) will change, so aside from potentially reducing or abolishing the RNRB, how else might Mrs Reeves raise extra tax revenue from inheritance taxes?

My opinion is that the chancellor will look at exemptions and reliefs with the view to abolishing some, or more likely making qualifying conditions harder to satisfy.

Two reliefs which could well fall into her crosshairs are Agricultural Property Relief and Business Property Relief. Scrapping these two reliefs altogether could raise over £1.4bn a year but could also severely damage the economy, so it’s a very unlikely move.

More likely will be a tightening up on what qualifies (my agricultural partner colleague Chris Solt has suggested that landowners who have tenanted land could see this treated as an investment asset rather than a farming asset, as it is currently).

For both reliefs, we are likely to see a narrowing of the definition of what counts as ‘trading’.

The other possible area where we may see changes is within pensions, which at present generally fall outside of IHT altogether.

Given that the Lifetime Allowance no longer exists, the chancellor may be tempted to put a limit on the size of a pension which can be passed on without a death tax.

I don’t see pension funds falling directly within IHT, but rather a new death tax which specifically focuses on pension assets.

IHT is one area where it is more difficult to mitigate any potential Budget measures in advance, as by definition there needs to be a death for any benefit to crystallise.

But anyone planning to make gifts (exceeding £3,000 a year) should also be mindful that an extension of the Potentially Exempt Transfer (PET) regime is very possible.

It would very easy, and dare I say tempting, for Mrs Reeves to extend the current seven year survival period for gifts to, say, ten years – a very simple but effective measure to legislate and collect revenue from.

Join the Lovewell Blake experts and EDP Editor Richard Porritt for breakfast on October 31 where the Budget will be explained and discussed. Search online for Lovewell Blake events to book your place.