I have previously speculated on what the Labour government might do with Inheritance Tax (IHT), and I had concluded that any major increases to IHT would be so politically painful as to not be worthwhile. As IHT seems to be disproportionately feared by the public, despite its relatively small role in the government’s finances, any significant changes to the IHT regime would likely trigger an avalanche of negative press coverage, far outweighing the benefits of any increases in revenue for the treasury.
However, the government has signalled that ‘painful’ tax rises may be coming in the October mini-budget, and given that the Labour has previously ruled out increases to income tax, National Insurance, and VAT, it is understandable that there is rife speculation about potential increases to IHT.
So, what could the government do to increase IHT receipts without causing itself too much political damage? I have set out below a few possibilities – I have no inside information, of course, but as someone who deals with IHT every day, these are some issues I can imagine are being looked at:
1. Business Relief (otherwise known as Business Property Relief):
This is a tax relief that is intended to encourage investment in smaller trading businesses, and to reduce the disruption to those businesses that might be triggered by an unexpected IHT liability. The policy justification for the relief is sound, and in many cases very sensible. However, like any tax relief, it has been pushed to its limits in its applicability, and arguably it is being used in many cases beyond its original conception.
For example, the relief applies to several publicly traded companies with market capitalisations of more than £1 billion: these are not small companies but major economic players who might well be expected to survive and thrive without the benefit of Business Relief.
One can imagine that Business Relief could be capped in value for any individual, or perhaps limited to companies below a certain threshold in value.
2. Lifetime Gifts:
Currently, the UK has a relatively unusual policy of unlimited potentially exempt transfers (‘PETs’) or, in normal language, gifts. This policy is only limited by the fact that gifts made in the seven years before a person’s death will be included in the IHT calculation (if they are above the annual modest limits). This ‘seven year rule’ means that a person can, if they are confident of surviving seven years, give an unlimited amount away to friends and relatives, with no real IHT implications.
Put simply, if I have £1 billion in cash, I can give it to my children, and as long as I survive seven years, no IHT will ever be charged on that gift.
While this policy is currently accepted as ‘normal’ in the UK, it is in sharp contrast to many other countries. For example in the USA, which generally is regarded as having a gentler overall IHT regime than the UK, there is a lifetime gift allowance of around ‘only’ £10 million.
Again, it is conceivable that a similar lifetime allowance for gifts could be brought in here, which would affect only the largest estates, leaving the vast majority of lifetime planning gifts unaffected.
3. Capital Gains Tax (CGT) Uplift on death:
The UK has a policy of a ‘CGT uplift’ on a person’s death. That means that any post-death sale of an asset is subject to CGT not on the increase in value while the original owner was alive, but only on any increase in value after death. To illustrate, if I bought an investment flat in 1990 for £50,000, and by 2024 it was worth £300,000, there would normally be a substantial CGT liability if I sold it during my lifetime. However, if I were to die and my executors sell it, there will not be any CGT charged on that gain. Not only does the government not get any CGT revenue from the sale of an asset which has massively increased in value, but I (knowing about this policy) would hesitate to sell the flat during my lifetime, even if it would otherwise make economic sense for me to do so.
A potential revision to this policy could include eliminating it altogether, limiting this CGT uplift to gains below a designated cap, or perhaps applying some CGT to the uplifted gains, instead of a 100% exemption.
Such changes would, again, only affect a small number of estates, and would not touch the vast majority of estates where the main asset is the principle residence, which already benefits from other CGT relief.
While I would be surprised if any of the specific ideas sketched out above are announced in the coming mini-budget, they serve as examples of how a fairly significant amount of revenue could be generated with changes that only affect a small number of very large estates, leaving most inheritances unscathed. Such changes would be less likely to generate a significant public backlash, and could actually be quite sensible in terms of policy.
For more information about IHT, Wills, and Probate, please contact Alexander Mahdavi, Head of JPC’s Private Client team, by email amahdavi@jpclaw.co.uk, telephone 0207 625 4424 or connect with him on LinkedIn.