IHT reform could pull 12,500 families out of paying, analysis shows

Inheritance tax (IHT) reform could prevent an estimated 12,500 families from paying the tax each year, new analysis from Quilter has indicated.

The wealth manager and financial adviser found that if the Government was to raise the IHT threshold to £500,000 and remove the residence nil rate band (RNRB) at the autumn statement, it would cost the Treasury £6bn from 2024/25 to 2027/28.

Quilter’s calculations show this reform would cost the Treasury on average £1.4bn per year and prevent thousands of families paying IHT each year. In the 2020/21 tax year, 27,000 estates paid IHT.

Further calculations revealed that if the Treasury chose instead to reduce the rate of IHT from 40% to 30%, it would cost the government £7.7bn from 2024/25 to 2027/28. The same number of estates would pay IHT, but their bills would be reduced.

Tax and financial planning expert at Quilter, Shaun Moore, said: “Making moves to modernise IHT could be a real rabbit out of the hat moment for Jeremy Hunt at the autumn statement. Despite IHT being paid by only 4% of the nation it is a tax that many people find egregious.

“Therefore, any changes could help garner the Conservatives some much needed popularity ahead of next year’s general election.”

Ahead of the Government’s autumn statement on 22 November, there have been a range of rumours that the Government may look to tweak the IHT rules by potentially lowering the headline rate of IHT, currently set at 40%, or by increasing the nil rate band (NRB).

The NRB has been set at £325,000 since 2009, with the RNRB in place since 2017. Currently, any estate valued lower than £325,000 has no IHT due. However, the RNRB offers an extra allowance of up to £175,000 if an individual passes their home to a children or grandchild. This means that together, a married couple or one in a civil partnership has an IHT allowance of £1m.

However, the RNRB has been criticised for its complexity and restrictiveness as its application depends on a variety of factors.

Moore added: “By increasing the NRB and scrapping the RNRB it serves to remove complexity from an area of taxation desperately in need of simplification while not costing the Government a huge amount over the long-term. They essentially can look generous while not actually giving that much away.

“Reducing the headline rate of tax would help reduce bills which would no doubt be popular, but it could be costly for the Government and people will still get landed with a IHT bill.

“If any changes are announced any benefit could be short-lived as if Labour does form the next Government it has already stated that it would reduce some of the IHT reliefs available such as business property relief and agricultural property relief.”

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