- Treasury officials are reportedly considering slashing Inheritance Tax (IHT) as chancellor Jeremy Hunt prepares for his Autumn Statement in November
- The overall IHT tax-free limit is to remain at £1 million until 2028 under current plans
- Threshold would now be over £1.4 million for a couple if IHT exemptions were inflation linked by former chancellor George Osborne and his successors
- The policy of freezing IHT thresholds since 2010 could cost families an extra £170,000 in death duties*
- Despite this, the vast majority of households do not pay IHT
- For people focused on minimising IHT, pensions are usually exempt from IHT and can sometimes be passed on completely tax-free on death
Tom Selby, head of retirement policy at AJ Bell, comments:
“IHT remains one of the UK’s most hated taxes, with Brits often railing against the idea of being ‘taxed twice’ – once when they earn money, and again on death. Grant Shapps was the latest politician to make this argument over the weekend.
“In reality, the overwhelming majority of people will not find their estates subject to IHT. In fact, just 1 in 25 households (4%) are expected to face an IHT bill, according to official estimates. However, the longer IHT allowances remain frozen at the current level, the more people will be dragged into paying tax on inherited assets on death.
“Politically, raising IHT thresholds – or even going a step further by abolishing the tax altogether – is likely to be appealing, particularly given we are closing in on a general election. However, IHT has been a reliable cash cow for the Exchequer, generating £2.38 billion in 2009/10 but rising to £6.1 billion last year.
“While falls in property prices are expected to limit growth in the next few years, the OBR expects IHT to generate almost £7 billion a year over the next six tax years. Given the financial straitjacket wrapped round the chancellor at the moment, he is more likely to opt for a small increase in the IHT allowance than abolishing the tax altogether.”
Pensions can minimise your IHT bill
“For anyone focused on passing money on tax efficiently to their loved ones on death, defined contribution (DC) pensions such as SIPPs are an extremely attractive planning vehicle.
“These types of pensions are usually exempt from IHT and, under current rules, it is possible to pass on money left to loved ones completely tax-free if you die before age 75. If you die after age 75, any inherited pension will be taxed in the same way as income when your nominated beneficiary or beneficiaries come to make a withdrawal. Money invested in ISAs, on the other hand, will count towards your estate for IHT purposes.
“Because of this generous tax treatment on death, it can often make sense to spend any DC pension assets you have last of all in retirement.”
What would the IHT threshold have been if it were uprated with inflation?
|
IHT threshold in 2028 |
Nil rate band |
Residence nil rate band |
Total for couples |
|
Actual IHT thresholds in 2028 |
£325,000 |
£175,000 |
£1 million |
|
If the government had done nothing except uprating with inflation since 2010 |
£502,000 |
N/A |
£1.004 million |
|
If the government had uprated the nil rate band and residence nil rate band with inflation |
£502,000 |
£212,00 |
£1.43 million |
Source: AJ Bell. IHT nil rate band uprated 2010/11-2027/28 in line with the previous year’s inflation. Residence nil rate band uprated from April 2021, having been set at £175,000 from 2020. CPI used until 2021, after which the latest OBR inflation projection is assumed. Figures rounded to the nearest £1,000.
*IHT at 40% equates to £172,000 on a sum of £430,000.
