IHT is paid on our net residuary estate when we die and there are allowances and exemptions.
So, we’re a couple of days away from the 2023 autumn statement, and of course a general election looms on the horizon too. Rumour has it Inheritance Tax (IHT) may be tinkered with on Wednesday. With a slow economy, a choppy political recent past for the Tories, will Jeremy Hunt look to IHT to provide confidence in the economy, and political brownie points for the Conservative Party? Equally, is it really the case that any change would only benefit the wealthiest among us?
IHT is paid on our net residuary estate when we die. There are however allowances and exemptions. It is normally paid at 40% on amounts over the exempt threshold (called the nil rate band). The current nil rate band is £325,000, so tax is paid thereafter at 40%.
Are gifts to a spouse free of IHT?
There are however certain exemptions. For example, all gifts to a surviving spouse are free of tax come what may (ie even when they are over £325,000). This is known as the spouse exemption. In addition, where part of the estate includes a family home, married couples can also claim a ‘property nil rate band’ of a further £175,000. So, each spouse will have a total nil rate band of £500,000. It doesn’t stop there for married couples! If on first death everything passes to the surviving spouse, and thereafter to (say) the children, then on second death, BOTH nil rate bands at that stage (totalling £1m) can be claimed.
A similar exemption applies where the residuary beneficiary is a charity.
Is IHT really a tax on the Elite few?
It’s easy for commentators to try to score political points and suggest that IHT changes would only benefit the elite few. The problem with this argument is that IHT now effects very many more than just the richest. ‘Middle England’ is now bearing a huge amount of the IHT burden – not least thanks to soring house prices over recent decades.
The relatively recent introduction of the property nil rate band went some way to address the issue with house prices, and by definition helped Middle England more than the very richest. So to would further tweaks likely benefit the bottom end of IHT paying estates, rather than massively impact the super wealthy.
Remember, if you die single, your estate only needs to tip over £325,000 and your estate will then be paying IHT at 40%! Wherever you are in the country (bearing in mind varying house prices), your home alone can so easily take your estate over the nil rate, and leave your estate handing over substantial amounts of tax after a lifetime of income tax, CGT, VAT, NI, council tax, etc etc etc.
What Changes can we expect to IHT in the Autumn Statement?
The political impact of giving the richest among us a giveaway surely leaves that an unlikely rabbit to be coming out of Mr Hunts hat? Surely the most likely is further allowances/exemptions aimed to help the many not the few (much like the property nil rate band) – thereby by taking more of Middle England out of the IHT bracket?
Political Points or Economic Growth?
Any changes to the IHT regime is unlikely to fuel growth in the economy, and help with current inflation issues. But, with an election looming, and the Conservative Party struggling in the polls, perhaps that will be reason enough for Mr Hunt to give something away as regards ‘death duties’…..?