IHT cuts could be a 'rabbit out of the hat moment'

It has been reported that the chancellor Jeremy Hunt is eyeing up cuts to inheritance tax in Hunt’s update to the commons on November 22. 

Hunt was pushed on whether he would consider dropping the tax by Conservative MP Ranil Jayawardena in the House of Commons on Tuesday but responded he would have to “wait until next week”. 

Inheritance tax is charged at 40 per cent for estates worth more than £325,000, with an extra £175,000 allowance towards a main residence.

A married couple can share their allowance, which offers the ability to pass on £1mn to their children without any tax to pay.

The starting threshold has remained unchanged since 2009 while the additional £175,000, known as the nil rate band, was introduced in 2017 and has not increased since 2021. 

Shaun Moore, tax and financial planning expert at Quilter said while the tax is currently only affects a small percentage of the population any changes could be a welcome boost. 

“Making moves to modernise inheritance tax could be a real rabbit out of the hat moment for Jeremy Hunt at the Autumn Statement," he said.

"Despite IHT being paid by only 4 per cent of the nation it is a tax that many people find egregious. Therefore, any changes could help garner the Conservatives some much needed popularity ahead of next year’s general election."

He said what is clear is that not all changes to the current IHT system are made equally.

"By increasing the NRB and scrapping the RNRB it serves to remove complexity from an area of taxation desperately in need of simplification while not costing the government a huge amount over the long term," he said.

"They essentially can look generous while not actually giving that much away. 

“Reducing the headline rate of tax would help reduce bills which would no doubt be popular, but it could be costly for the government and people will still get landed with a IHT bill."

However, Moore explained if any changes are announced any benefit could be short-lived as if Labour does form the next government it has already stated that it would reduce some of the IHT reliefs available such as Business Property Relief and Agricultural Property Relief.”

Meanwhile, Laura Suter, head of personal finance at AJ Bell, said any cuts would benefit larger estates “enormously”.

Cutting the headline rate from 40 per cent to 35 per cent would save an estate worth £1.5mn a total of £25,000 in tax, in comparison to the £467,500 it would save an estate worth £10 million.

A larger rate cut to 20 per cent would net an estate worth £1.5 million a tax saving of £100,000 but a tax saving of £1.87 million for estates worth £10 million.

Suter added: “The Treasury is already on track to have a record-busting year when it comes to IHT receipts. It collected almost £4bn in inheritance tax revenues in the first half of the tax year, an increase of £400mn compared to the same time last year, meaning it's on track to beat the previous annual record of £7bn.

“To put those figures in context, more IHT has been paid in just six months than was paid in the entire year a decade earlier. This itself has given the government a bit of wiggle room to cut the tax or tinker with the thresholds, as rising asset prices and inflation have helped to fuel receipts in recent years."

However, the plans by one individual have been branded a “half-baked and half-hearted attempt to woo voters” by Nigel Green the CEO of deVere Group.

He thinks the tax should be abolished altogether, rather than cut. 

Green said: “The number of homes facing the IHT burden has more than doubled since 2010, despite it being designed as a tax for only the super wealthy, and around 40 per cent of homes sold in England and Wales in 2022 were worth more than the basic allowance.

“IHT is clearly no longer limited to the ultra-wealthy, as initially intended. It is increasingly affecting middle-class families whose primary asset is their family home."

He explained that the desire to leave a legacy for loved ones is "a deeply ingrained human instinct", and individuals find the IHT particularly objectionable as it essentially constitutes double taxation—taxation on assets that have already been paid for and taxed before.

tara.o'connor@ft.com

What's your view?

Have your say in the comments section below or email us: ftadviser.newsdesk@ft.com