There have been reports in the press that the Government may reduce or indeed abolish Inheritance Tax. We asked one of our Tax Partners, Tim Humphries, to explain the current thinking and the impact this might have on both individuals and the Treasury in general.
Tim explained, “this isn’t the first time in recent years that Inheritance tax has been under the Microscope. Previous recommendations from the Office of Tax Simplification were ignored and the system remained unchanged”.
Who pays Inheritance Tax?
According to reports less than 4% of all deceased Estates actually pay Inheritance tax and a simple abolition would cost the UK Government around £7bn in income. The Chancellor, Jeremy Hunt, has already stated that at this point in time they cannot afford to make unfunded tax cuts.
How might the Government afford to be seen to be cutting taxes?
It is worth remembering that where an asset is inherited the base cost for capital gains tax is uplifted to current market value. This applies even where a spouse or civil partner inherits an asset which is free of Inheritance tax under the spouse/civil partner exemption.
So, if there were to be an abolition of Inheritance tax, the suspicion is that the Government will fund this by removing the rebasing of assets on death. This means that when you sell the assets you inherit you pay CGT based on what the deceased paid for it. The Government raise far more in CGT annually than they do in IHT and the 96% of Estates that don’t pay IHT do still get to rebase the deceased’s assets.
For example, a beneficiary may inherit a property worth £1million free of Inheritance tax due to a combination of the nil rate and main residence bands. Let’s say the property was acquired 40 years ago for say £100,000 then sold shortly after it was inherited when the value was still £1m; this sale could net the Government up to £252,000 in Capital Gains Tax (£900,000 gain @ 28%). Whereas under the current regime there would be no Inheritance tax and no CGT as the base cost would be uplifted to £1million.
Would the abolishment of Inheritance Tax be good news for everyone?
I doubt it would be all good news if there was to be an announcement regarding the abolishment of Inheritance Tax.
There may be other options available to the Government. They could simply reduce the rate of Inheritance tax, reduce the Business and Agricultural Property Reliefs or remove the uplift in base cost for transfers between married couples or indeed all beneficiaries. All of these have been mooted in the past but not enacted.
There are investments which benefit from Business Property Relief. The market for these could be adversely affected by any reduction in, or abolition of, Inheritance tax or Business Property Relief.
The Autumn Statement will be delivered on 22 November when we will find out more. If you would like to receive a copy of our full Budget report by email, the morning after the Chancellor’s announcement, you can sign up here.
If you have any questions regarding Inheritance Tax or would like to speak to a member of our tax team regarding Inheritance Tax planning you can contact us on 0203 697 7147 or you can visit our web chat in the bottom right corner which is manned during office ours and you can leave a message out of hours.
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