Inheritance tax could be abolishedInheritance tax
Could inheritance tax be for the chopping block at the next Budget?
Speaking at a Conservative Party conference fringe event this week, Chancellor Sajid Javid gave a strong hint that the unpopular death tax could be reformed or even abolished later in the year.
The event, which was organised by the Institute of Economic Affairs and the Taxpayers’ Alliance, saw the Chancellor admit that scrapping inheritance tax is something a Conservative government may consider soon.
He acknowledged that inheritance tax is hugely unpopular, due to the inherent unfairness of taxing income during life and at death.
Speaking at the fringe event, Javid said:
“I shouldn’t say too much now, but I understand the arguments against the tax.
“I do think that when you pay taxes already through work or through investments and capital gains and other taxes, there’s a real issue with then asking [individuals], on that income, to pay taxes all over again.
“Sensible changes have already been made, but it is something that is on my mind.”
So what might we expect to see in terms of inheritance tax reform in a Budget later this year?
The Office of Tax Simplification is currently carrying out a review of inheritance tax, with the goal of simplifying this tax system. Their first report was published last November and included a recommendation the government should transition taxpayers to a fully digital system for inheritance tax.
Their final report, published in July this year, proposed changes to the ‘seven-year rule’ for potentially exempt transfers, as well as making changes to taper relief.
As things stand, inheritance tax is charged on the value of taxable estates in excess of £325,000. It’s charged at a rate of 40% on death.
No inheritance tax is paid on estate values under this nil-rate band, or on monies left to a UK resident spouse or civil partner, registered charities and some other organisations.
In addition to the £325,000 nil-rate band, a residence nil-rate band is being phased in, which provides a further exemption where the main residence is left to a direct descendant on death.
This residence nil-rate band was introduced in 2018/19 at £125,000 and currently stands at £150,000 for the 2019/20 tax year. It will continue to rise to reach £175,000 in 2021/22, at which time when combined with the nil-rate band, a couple could potentially leave £1,000,000 free of inheritance tax.
Inheritance tax is a big deal for a relatively small number of families.
According to the latest official figures, 28,100 estates were charged inheritance tax in the 2016/17 tax year, up 15% on a year earlier. It means 4.6% of estates are liable for the death duty.
These families paid an average inheritance tax bill of £179,000, to pay a total of £5.4bn in inheritance tax, a new record level.
Inheritance tax is often referred to as a voluntary tax because there are several steps you can take to reduce or even entirely mitigate this tax for the next generation.
A good starting point is to understand how much tax your children and others would pay if you were to die today. You can then explore the various options, which include making use of available allowances, gifting money, and placing assets in a trust.