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If the government were to raise the inheritance tax threshold to £500,000, and remove the residence nil rate band, it could cost the Treasury £6bn from 2024/25 to 2027/28, analysis from Quilter has revealed.
The firm’s calculations show this reform would cost the Treasury on average £1.4bn per year and prevent around 12,500 families paying IHT each year.
In the 2020/21 tax year, 27,000 estates paid IHT.
Further calculations show that if the Treasury chose instead to reduce the rate of IHT from 40 per cent to 30 per cent, it would cost the government £7.7bn from 2024/25 to 2027/28.
The same number of estates would pay IHT, but their bills would be reduced.
Similarly, if the rate of IHT was dropped to 20 per cent it would cost the government £15.4bn from 2024/25 to 2027/28.
Quilter said rumours are swirling that £15bn of fiscal headroom might be used to help pay for a reduction in the headline rate of inheritance tax.
Shaun Moore, tax and financial planning expert at Quilter, said: “Making moves to modernise IHT could be a real rabbit out of the hat moment for Jeremy Hunt at the Autumn Statement.
“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.”
Ahead of the Autumn Statement there have been a variety of rumours that the government may look to tweak the IHT rules by potentially lowering the headline rate of tax currently set at 40 per cent or by increasing the nil rate band.
The nil rate band has been set at £325,000 since 2009, with the residence nil rate band in place since 2017.
At present any estate valued lower than £325,000 has no inheritance tax due.
However, the residence nil rate band offers an extra allowance of up to £175,000 if you pass your home to your children or grandchildren.
This means that together a married couple or one in a civil partnership has an inheritance tax allowance of £1mn.
Moore said: “What is clear is that not all changes to the current IHT system are made equally.
“By increasing the nil rate band and scrapping the residence nil rate band 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.
“They essentially can look generous while not actually giving that much away.”
However, the residence nil rate band has been criticised for its complexity and restrictiveness as its application depends on a variety of factors.
It is also sometimes unable to be applied to more modern family dynamics as it can only be used to pass on a home to direct descendants so a single person with no children could not use it to pass on their home to other relatives or friends.
“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,” Moore added.
“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.”
sonia.rach@ft.com
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