Rishi Sunak’s government is exploring major reforms to inheritance tax to boost the Conservative Party’s standing ahead of next year’s UK general election.
Potential changes include reducing the highly divisive tax rate (currently 40%) or abolishing it entirely. Asked about discussions on the issue within government, the Prime Minister said he would not “comment on tax speculation”.
“The most important tax cut I can offer the British people is to halve inflation,” Sunak added, referring to the five “people’s priorities” he has vowed to deliver before the next national election. one.
Downing Street aides have been discussing the options of lowering or abolishing inheritance tax, but a decision is not expected until 2024, according to government insiders.
UK Chancellor of the Exchequer Jeremy Hunt said last week in the Autumn Statement on November 22 that tax cuts were “almost impossible”. Any move on inheritance tax is expected to be tabled in next spring’s budget, or as a Conservative election manifesto promise.
What is inheritance tax?
HM Revenue and Customs levies inheritance tax (IHT) on the estate of a deceased person, including all their property, money and possessions. For properties worth more than £325,000, the overall tax rate is 40%.
Under the ‘residence nil rate band’ people can pass on their main residence to children and grandchildren, increasing their tax-free allowance by £175,000 and allowing them to pass on a total of £500,000 before claiming IHT. For a couple, this figure rises to £1 million.
How much will the estate tax increase?
The amount of IHT payments has grown steadily in recent years, reaching a record high of £5.76 billion in 2020-21, the latest full year. dataAccording to HMRC. However, it still accounts for less than 1% of total tax revenue. In comparison, income tax raised about a third of tax revenue in 2020-21 and VAT generated a fifth of total tax revenue.
The latest monthly estimates released by the tax authority show IHT revenue continues to surge. In this tax year, the Office for Budget Responsibility, the independent fiscal watchdog, predicts IHT will raise £7.2 billion.
Who pays inheritance tax?
A very small proportion of the population is affected by IHT. The latest figures from HMRC show that of the 722,000 deaths recorded in the UK in 2020-21, only 27,000 estates paid IHT – less than 4% of deaths.
However, the number of estates with IHT liability has increased in recent years, with a 17% increase in 2020-21 compared with 2019-20. HMRC attributed the growth in 2020-21 to rising death rates during the worst of the Covid-19 pandemic, but tax experts also pointed to rising asset values and a freeze on IHT thresholds, with more people being dragged into tax net.
Rachael Griffin, tax and financial planning expert at wealth management firm Quilter, said “more middle-income earners, particularly in the south-east of England” were being affected by IHT, partly due to “rising house prices”.
Official figures show the property market plays an important role in determining where estates are subject to inheritance tax. London and the South East had the highest number of estates incurring IHT charges on death in 2020-21, with 4,800 and 5,650 estates respectively.
The two regions each have a total IHT tax liability of £1.3 billion in 2020-201, accounting for 45% of the entire UK IHT tax liability. The average tax bill in London is £279,200.
In contrast, HMRC said the lowest number of estates paying IHT were in the North East of England, Northern Ireland and Wales due to “lower house prices” and “lower wealth transfer value”.
Why does Sunak think abolishing or cutting IHT will improve his electoral chances?
Many areas in the UK with a high concentration of people paying personal income tax are the constituencies of Conservative MPs, and the party hopes to win votes through reorganization.
Sunak and his advisers may argue that changes to IHT will not alienate voters who are less likely to pay. Although the proportion of UK inheritance tax paid to IHT is only in single digits, it has been described as “unpopular”, “unfair” and “Britain’s most hated” tax, polling poorly with voters.
Dan Neidle, a tax lawyer and founder of Tax Policy Associates, said one of the reasons behind this perception is that IHT is full of exemptions and deductions, so in practice the wealthiest people “have lots of opportunities to avoid (paying) it”.
Nimesh Shah, chief executive of accounting firm Blick Rothenberg, said history showed Sunak’s move “could win votes”.
He cited the then-shadow chancellor George Osborne’s promise to cut IHT in 2007, when the Conservatives feared they would be wiped out in a rumored snap election.
The policy announcement proved instantly popular and was later cited as one of the reasons why then Prime Minister Gordon Brown decided not to vote.
Will abolishing IHT be popular?
Tax advisers say their clients have reacted positively to reports that the government is exploring cutting or abolishing IHT. But some warn that any tax benefits may need to be paid for through tax increases or spending cuts elsewhere.
Lucy Woodward, a partner at accountancy firm Saffery Champness, said: “Any future government that wants to abolish IHT will need to walk a political tightrope – balancing the gains with losses to the Treasury of almost £6bn. Voter goodwill.”
Neidl warned that politicians can fall into the “trap” of thinking that tax policies that receive favorable reviews in focus groups or polls will be popular once enacted.
“IHT is an unpopular tax. That doesn’t mean its repeal will be popular,” he said.
At the same time, the Conservatives need to be wary of perceptions that they are giving tax breaks to the wealthy. Labor, which is leading the polls, sought to link Liz Truss’ ill-fated “mini” Budget when she became prime minister last year to the latest discussion in No 10.
Darren Jones, shadow chief secretary to the Treasury, said: “A year ago Liz Truss destroyed the economy with unfunded tax cuts. Now Rishi Sunak is doing what Liz Truss wants.
“Abolition of inheritance tax – which 96% of people never pay – equates to an unfunded tax cut of £7.2 billion a year. The biggest threat to the economy is the Conservatives.”
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