Will Inheritance Tax be abolished & will it make a difference to you if it is?

The next UK Budget is planned for 6th March, with the Chancellor, Jeremy Hunt, setting out his stall before the UK General Election planned for later in the year. Rumours abound that inheritance tax (IHT) will be abolished, which may be unlikely as IHT tax receipts have grown year on year in the last decade due to rising house prices across the country. With the backdrop of a big black hole in the UK finances, IHT may not disappear altogether, but perhaps there is an opportunity for the government to make changes to IHT to make it fairer for all?

It’s time to revisit the IHT tax-free thresholds

Most of us know the basics of IHT and that, as individuals, we have an IHT tax-free threshold of £325,000 or £500,000 for a couple.

You may not realise that if you have a main residence that you want to pass down to your children, you can do so IHT tax-free, and as a couple, your IHT tax-free threshold increases to £1 million.

But what happens if you do not have children, or indeed, if you are unable to have kids? Your IHT tax-free threshold sits at £325,000, putting you at a tax disadvantage compared to those who do. Hardly seems fair, does it?

A fairer approach would be to equalise the IHT tax-free thresholds for all, so there is no tax advantage for being a parent. Or better still, abolition may not be a bad idea after all, thus avoiding this argument altogether.

Labour’s stance is that it doesn’t make a difference if the IHT thresholds are equalised, as IHT only impacts 5% of the population. Rather, abolition of IHT or further help for those who are impacted by IHT should be considered instead to ensure fairer equity in society.

However, if you are one of those who are not impacted by IHT as the total value of everything you own is well below £325,000, you may look at IHT and consider it a good thing that some of the wealth that is taxed via IHT is distributed across society versus being handed down by the wealthy, generation to generation, tax-free.

The reality is that it is not as simple as that. Invariably, the wealthy have the means to tax plan in their lifetime to mitigate their IHT liability, and therefore less of their wealth is distributed more widely at their death.

Modern IHT has been in place in the UK since 1984 and was introduced as an estate duty, or tax on capital and land, to fill a £4 million government deficit. But IHT actually first appeared in 1694, as a probate tax, a tax on personal property left in your will, 330 years ago!

Although IHT has always been a tax levied on the wealthy since its inception hundreds of years ago, it’s perception by wider society as a deeply unpopular tax can’t be denied, however odd that may seem.

IHT abolition or changes may therefore be the tool that the Tory’s leverage as a last-ditch attempt to shore up support for the next general election.

Roll on 6th March….