19 Oct 2023

Will inheritance tax be abolished? 

When a budget update is looming, we always see speculation of financial change creeping into the headlines. As accountants, it’s our responsibility to be aware of these conversations but, at Monahans, we always ensure to dig a little bit deeper beyond the news to keep track of the financial landscape.

What is inheritance tax?
Inheritance tax (IHT) is an unpopular tax amongst the public with roots that can be traced back to the introduction of legacy duties in the 17th century. Over the years, various forms of taxation on wealth and inheritances were implemented, culminating in the current system of IHT.

What are the rules?
When someone passes away, their estate will include the net value of all assets and any excess above the IHT threshold of £325,000 may be subject to 40% tax. If the value of your estate is below the £325,000 threshold, there is usually no IHT to pay. The Residence Nil Rate Band means that leaving a main home to lineal descendants will increase the tax free threshold by up to a further £175,000 (provided the total estate is not valued over £2million) so that the value of £500,000 can pass tax free per individual.

In simple terms, it’s a harsh tax in that it takes 40% off someone’s wealth that has been built up over many years and earned during a lifetime. It collected £3.2 billion last year and, although the percentage of people forced to pay IHT is relatively low, rises in property value will mean more and more people will get dragged into paying it. In fact, studies have shown that by 2032-33, IHT will rise to just over £15 billion as a result of increasing levels of wealth held by subsequent generations of retirees.

What will happen if the rules change?
The current design of IHT has presented a number of problems over the years. Relief for agricultural and business assets, shares, and the total exemption of pension pots from IHT, has opened up channels to avoid the tax, therefore causing complications. Over the last three years, IHT and Capital Gains Tax (CGT) changes have been explored by the treasury to make the process easier and to reduce the chance of loopholes.

If there are changes made in the upcoming budget, CGT will most likely be affected too as the two go hand in hand. Whether or not IHT will be abolished, we will have to wait and see, but there might be a reform to the system on the horizon. It’s unlikely that the Government will isolate one tax without considering others and, realistically, abolishing IHT alone would leave a glaring hole in the tax system.

If you need support or clarity on IHT or have any general tax queries, get in touch with the Monahans team today. We will be providing more specific information following the Autumn Budget in November.

Richard Brooks