As the UK general election looms on the horizon, there are whispers of significant tax changes in the air. Rishi Sunak, at the helm of the UK government, is considering a significant shake-up of the inheritance tax system. This move is not just about revenue or economic strategy; it’s also about politics and positioning the Conservative party favourably ahead of the polls. The FT looked at the calculations he is making.
Inheritance Tax Explained
What is Inheritance Tax (IHT)?
When someone in the UK dies, their estate, comprising their property, money, and other possessions, is assessed for inheritance tax. Currently, HM Revenue & Customs levies a tax of 40% on estates valued over £325,000. However, with the “residence nil-rate band” in place, individuals can pass their main home to their children or grandchildren. This provision raises the tax-free allowance by £175,000, allowing them to pass on up to £500,000 without incurring IHT. For couples, this limit doubles to £1 million.
How Much Does It Contribute to the UK’s Coffers?
While IHT might sound significant, it has traditionally played a relatively minor role in the government’s total tax earnings. In the fiscal year 2020-21, IHT contributions reached a record high of £5.76 billion. However, this still constituted less than 1% of all tax revenues. For perspective, income tax and VAT contributed about a third and a fifth of total tax revenues, respectively, during the same period.
The Current State of IHT: Who’s Paying?
Not everyone feels the pinch of IHT. According to HMRC’s data for 2020-21, of the 722,000 deaths recorded in the UK, a mere 27,000 estates (less than 4%) were liable for IHT. The housing market significantly influences these numbers. For instance, regions with higher property prices, like London and the South East, witnessed the majority of IHT liabilities. Together, these two regions shouldered nearly 45% of the UK’s total IHT burden, with the average tax bill in London standing at a hefty £279,200.
Sunak’s Calculations: A Political Play?
Why Change IHT Now?
Several constituencies with a higher concentration of estates paying IHT are currently under Conservative leadership. Thus, Sunak and his team believe that revising the IHT system might win them more votes. Even though a small fraction of the UK’s estates pays IHT, it’s considered one of the most disliked taxes. Part of this disdain arises from the perception that the super-rich can exploit various exemptions and reliefs to sidestep this tax.
Historically, pledges to revise IHT have been politically rewarding. A similar promise by George Osborne in 2007, then shadow chancellor, saw a surge in Tory popularity.
Pros and Cons: What the Experts Say
Reactions to the proposed changes have been mixed. Some tax advisers revealed that their clients were optimistic about the potential cuts or a complete scrapping of IHT. However, there are also warnings about the broader economic implications. Lucy Woodward, from the accountancy firm Saffery Champness, noted the need to balance voter goodwill with a potential £6 billion reduction in government revenues.
Dan Neidle emphasised that while IHT might be unpopular, removing it doesn’t guarantee widespread approval. Moreover, any move to adjust IHT raises concerns about the Conservative party being perceived as favouring the wealthy.
Conclusion: The Road Ahead
As the debates and discussions continue, it’s clear that any decisions on IHT will be pivotal, not just economically but also politically. While the Conservatives weigh their options, the opposition, led by Labour, is already challenging the discussions. Darren Jones, from Labour, cautioned against such “unfunded tax cuts”, labelling the Conservative party as the “biggest threat to the economy”.
For the average UK citizen, it’s a time to watch, understand, and prepare. As always, changes to the tax system have ripple effects, impacting personal finances, property markets, and broader economic strategies. Whether Sunak’s proposed changes come to fruition or not, the discussions around IHT highlight the intersection of politics, finance, and public sentiment.