Death tax. Boomer tax. Britain’s most-hated tax. Whatever you call it, it’s becoming more than likely that Labour Chancellor Rachel Reeves intends to make a few changes to the inheritance tax system in the upcoming Autumn Budget.
This appears to be the sentiment following a flurry of economic announcements today.
First off, the Office of National Statistics showed us what Reeves has already told us: Government borrowing is extremely high.
Clocking in at £16.6 billion, last month’s borrowing marked the third highest September on record, while expenditure soared to £93.7 billion due to interest repayments and public sector pay hikes.
According to Reeves, the former Tory government left a £22 billion hole in Britain’s finances, which can only truly be plugged with higher taxes and lower spending.
Thankfully, Reeves has a “glistening pot at the end of the rainbow” in the form of IHT, as William Stevens, head of financial planning at Killik & Co. put it.
That glistening pot brought in £4.3 billion between April and September, marking a £400 million year-on-year increase, per HMRC’s latest data dump.
Whether you hate it or not, IHT is clearly an “absolute cash cow” for the government, Wealth Club investment manager Nicholas Hyett said.
It is, therefore, supremely unlikely that Reeves will put this cash cow out to pasture on 30 October.
According to Hyett, “No one knows what changes will be announced, but most agree there will be some attempt to milk more revenue from estates”.
What’s on the chopping block?
IHT, which only applies to around 5% of estates, is currently levied at 40% on estates valued above £325,000. There is currently a freeze on this threshold until 2028, but Reeves has many more levers to potentially pull.
Changes might include removing the 'residence nil-rate band', which currently allows an additional £175,000 to be passed on tax-free in addition to the £325,000 standard nil-rate band when transferring a family home to direct descendants.
Another option is the ‘spousal exemption’, which permits assets to be transferred between spouses or civil partners without incurring IHT.
This spousal exemption, according to Sarah Coles, head of personal finance at Hargreaves Lansdown, “is the largest IHT tax break on the books”.
However, removing this exemption might be one political own goal too many. “The hope is that because this is such an essential exemption, the government will be wary of making a change that causes potential hardship to so many, and could lead to people being forced to sell their home to pay an inheritance tax bill,” said Coles.
Other potential exemptions on the chopping block include the pensions exceptions, the business property relief and the agricultural property relief, all of which protect billions of estates from incurring IHT annually.
Currently, individuals can also gift up to £3,000 per year free of IHT.
Worryingly for Britain’s growth companies, there is also the possibility that Reeves will remove an IHT exemption on investments made in the AIM junior market.
There are clearly a lot of options on Reeves’ table; we’ll find out next Wednesday what stays and what goes.