In her recent speech at the House of Commons, the UK’s new Chancellor – Rachel Reeves – set out what she called ‘the scale and seriousness’ of the government’s financial state. Claiming she’d discovered a big £22bn ‘black hole’ in public finances.
That’s a lot of money missing. And somehow, the issue needs to be addressed.
Staying true to their word, Labour has officially ruled out raising taxes on working people – including VAT, income tax and national insurance. But so far, they’ve been very tight-lipped regarding their plans for inheritance tax (IHT).
Their general election manifesto was incredibly vague on this topic, simply stating that Labour will ‘end the use of offshore trusts to avoid inheritance tax’. And since being elected earlier this year, there’s been no indication whether IHT reform is on the cards or not.
One thing is for sure, however – IHT is a big source of revenue for the treasury. It raked in £7.5bn in the last financial year alone (ending March 2024), and could be an easy way for the government to (at least in part) plug the black hole and commit to their spending pledges.
As such, there’s been wide speculation on this topic – with many experts believing that one or more inheritance tax changes could be launched this autumn.
Here we take a brief look at what those changes could be.
Potential IHT changes currently on the rumour mill
- Curbing inheritance tax relief
To help plug the deficit, Reeves has said she will look at ‘every single tax break’. And this could signal changes to Business Property Relief (BPR) and Agricultural Property Relief (APR).
Currently, a person can claim up to 100% tax relief on the inheritance of a company, shares or agricultural land (if it’s being actively farmed). This allows family-owned businesses to continue to trade following the death of the owner – without the worry of a hefty IHT bill.
It’s unlikely for this relief to be scrapped entirely, but a few changes could be in the pipeline.
Plans thought to be in consideration include:
- capping BPR and APR at £500,000 per person
- increasing the level of business activity required to qualify for relief, from 50% to 80%
- introducing a new system in which IHT is spread over 10 years
Of course, at this stage, such changes are pure speculation. But it’s easy to understand how – if they were to be implemented – they could have a significant impact on thousands of SMEs. Particularly those whose business or farm is their main asset and livelihood.
If relief is restricted, many may be forced to sell or wind up business just to pay the IHT bill.
- Abolishing relief on unquoted shares
At present, there are also tax allowances in place for unquoted shares – which are shares in a business not listed on the stock exchange or listed on the Alternative Investment Market (AIM).
These allowances have garnered some negative press in recent months.
Investing in such shares has become an increasingly popular strategy to avoid inheritance tax – allowing people to move assets in a way that reduces their bill, or eliminates it entirely. As a result, it could be an area that’s targeted in the upcoming budget.
- Adding pension pots to the mix
Pension savings are currently exempt from inheritance tax.
But unfortunately, that might be about to change.
Rumours indicate that Labour could seek to include pension pots as part of the taxable estate after death. They may also announce changes to spousal exemptions and/or introduce a new personal nil rate band (i.e. the maximum amount that can be inherited without paying tax).
All of which could potentially push more families into the ‘IHT net’ – either presenting them with a bill they wouldn’t have previously had, or increasing how much inheritance tax is owed.
- Higher IHT rate
One of the simplest reforms proposed, but one that would have a notable impact.
At the moment, the standard IHT rate is 40% of anything above the inheritance tax threshold of £325,000. However – to help redistribute wealth and increase inheritance tax receipts even further – there’s a strong possibility that Labour will increase this rate during the budget.
Could we help with your IHT planning?
The likelihood is, inheritance tax reform of some kind is on the horizon.
It’s hoped that any significant changes will be introduced through consultation this autumn, allowing more time for people to plan their future finances. But whatever happens between now and the October Budget, it’s worth getting to grips with some of the basics.
For example, you should ask yourself:
- Would you be affected by inheritance tax?
- Who do you want to benefit from your assets?
- Could you afford to gift assets at present?
- Do you have an up-to-date will?
- Have you discussed plans with your family or a solicitor?
With so many rumoured changes, now is the time to act. It may be that some simple forward planning could help to reduce the IHT bill due on your estate – or avoid it altogether.
Here at St Helens Law, we’re unable to provide financial advice on this matter.
However, we do have a team of experienced inheritance tax solicitors who can offer legal advice on IHT planning and the organisation of your estate – ensuring that as much inheritance as possible goes to your loved ones, and minimising the amount that goes to the tax man.
We can also assist in the writing of a will – a key part of inheritance tax planning – with both professional will drafting and online will services available to suit your preferences.
If you’re concerned about IHT, particularly with respect to the proposed inheritance tax changes and how they might affect you, why not book a free consultation with our wills and probate team? Simply fill out the form at the top of the page and we’ll get back to you with further information.
Alternatively, if you have any questions about inheritance tax planning, please don’t hesitate to contact us. You can give us a call at any time on 01744 742350 or send an email to probate@sthelenslaw.co.uk.