Ethan Tellett: The Latest Developments in Inheritance Tax

There has been increasing talk of changes to the inheritance tax (IHT) regime since a source within the government said there was a “live discussion” on the matter.

Labour Shadow Chancellor Rachel Reeves then ruled out a wealth tax should Labour get into government at the next general election. Secretary of State for Levelling Up Michael Gove responded by stating that the Conservatives should consider tax cuts to boost their ratings in the polls.

However, at the Conservative Party Conference, Prime Minister Rishi Sunak refused to commit to any tax cuts prior to the next election.

So where does that leave us? And what is the best course of action when considering your estate planning?

Due to the allowances available, most people will never pay IHT – in fact less than 4% of UK deaths in 2020/21 paid IHT. This is partly because those with significant estates can mitigate or remove any potential liability with careful financial planning.

Removing IHT altogether would cost the Treasury approximately £8bn per year. It is estimated that a one percent increase in Income Tax or VAT would be needed to recover these lost funds. Politically, it makes little sense to remove a tax that impacts just tens of thousands of people if it comes at the detriment to millions of others. Nevertheless, IHT remains unpopular with the general public as it is seen as a double taxation on earnings that have already paid tax, that is due at a time when people are grieving the loss of a loved one.

With uncertainty around the future of IHT, you may be tempted to put off any estate planning. However, there is always risk in waiting for a change (or lack of change) in legislature. Far better to act quickly by working with a regulated wealth planner to understand any potential tax liability and how to mitigate this.

There are many ways in which you may reduce your potential IHT liability and increase the amount you are able to pass on to your chosen beneficiaries.

Perhaps the most straightforward approach is to purchase an insurance policy that pays out an amount equivalent to your IHT liability in the event of your death. Discussions with a wealth planner can ensure you purchase a suitable and affordable policy.

If you are more certain that you will never need to access some of your capital, you may make outright gifts to your loved ones. However, for such gifts to be completely removed from the estate, the donor must survive seven years after the gift is made. Gifts to charity do not need to meet this requirement. Gifting more than 10% of your net estate (after allowances and exemptions) to charity reduces your rate of IHT from 40% to 36%.

If you want to remove assets from the scope of IHT but retain access in case they are needed in the future, there are certain investments that may qualify for Business Relief once held for more than two years. If these investments are still held at time of death, they will be excluded from your estate for IHT purposes. These investments are also a way to support growing UK businesses.

Finally, make sure you are aware of all of your available allowances. In addition to the nil rate band and residence nil rate band, you also have an annual allowance of £3,000 per year, a small gift allowance of £250 and various amounts that can be gifted tax-free to relatives getting married. It is also possible to gift excess income if it can be proved that such gifts would not impact your standard of living. A regulated wealth planner should be aware of all allowances and how you may best utilise them.

As we gear up towards the next general election, each political party will undoubtedly propose changes to tax policy in a bid to win votes. It is impossible to know what any government will implement in the future. The best course of action is to put together a financial plan based on current legislation and to review this regularly. The sooner you take your first step to formulating your financial plan, the better.