Inheritance Tax- (IHT) Will Labour Make Changes?

Following Labour’s win at the 2024 General Election, there has been speculation that changes may be made to the current Inheritance Tax (IHT) regime in order to generate more tax revenue.

Labour’s plans for Inheritance Tax have not been confirmed, however it is likely that any changes would target reliefs primarily benefitting the wealthy. There are a multitude of reliefs under the current Inheritance Tax legislation, predominantly utilised by individuals with substantial estates.

The Institute for Fiscal Studies (IFS) noted that the effective rate of Inheritance Tax peaks at 25% in respect of estates between £3 million and £5 million and declines to 17% on estates over £10 million. This demonstrates the significant impact that succession planning can have on the amount of tax levied on an estate, by ensuring utilisation of available Inheritance Tax reliefs.

Potential Changes TO INHERITANCE TAX

Reliefs that Labour may set their sights on include Agricultural Relief (AR) and Business Relief (BR). Broadly speaking, under the current legislation, AR is available in respect of agricultural property at 100% or 50% where the relevant conditions have been met. Assets which could qualify for AR would include land or pasture used to grow crops or rear animals, as well as farm buildings and farmhouses, located within the UK. In order to qualify, any buildings must be of a size and nature appropriate to the farming activity being carried out.

Similarly, BR is available in respect of ‘relevant business property’ at 100% or 50% provided certain conditions are met. Business property can include a sole trade business or interest in a partnership, unquoted shares in a trading company, as well as certain assets used by a business but owned personally by the individual making the transfer.

It may be that AR and BR are scrapped entirely, or relief may be capped at £500,000 per person. The IFS argue that there is a strong case for abolishing these reliefs as they currently cost around £400 million and £1.4 billion respectively each year in lost tax revenue. However, abolition or restriction of this relief will seriously impact the ability for individuals to pass on family farms or businesses.

Another IHT relief that may be targeted is the tax-free passing on pension pots. Currently, defined contribution pension pots can be passed on in full without being subject to IHT, however the IFS estimates that abolition of this relief would raise approximately £200 million in IHT the 2024/25 tax year. It is anticipated that this would double by 2029/30.

Individuals who benefit from any reliefs that may come under review by the new Labour government should consider the possible effect any changes may have and seek advice on options to mitigate the impact on their expected IHT position.

Planning Ahead and Lifetime Gifts

Planning ahead is key as various IHT exemptions are available in respect of gifts made during a person’s lifetime, which could be increasingly beneficial if changes are made to AR, BR or relief on pensions.

Each person is able to benefit from annual gifting allowances, including the £3,000 annual exemption for gifts and the small gifts exemption, which enables gifts to any number of individuals of up to £250 per person to be made each year. Additional gifting allowances are available in respect of gifts for weddings or civil partnerships. Wedding gifts of up to £5,000 can be made to a child, reducing to £2,500 to a grandchild or great grandchild, and £1,000 to any other person.

In addition, gifting by way of ‘normal expenditure out of income’ is exempt from IHT, allowing individuals to pass surplus income onto beneficiaries, provided that it does not impact their standard of living, by gifting as part of their regular spending habits.

Where an individual gifts assets of any value during their lifetime to another individual they will usually be Potentially Exempt Transfers (PETs). Where a gift is a PET, the asset is exempt from IHT provided the donor survives for 7 years from the date of the gift,  at which point the asset will fall out of their estate for IHT purposes. Where the donor does not survive 7 years, the asset will be subject to IHT on death, however the rate of IHT charged is tapered where there has been more than 3 years between the date of the gift and the date of death.

Seeking advice and planning ahead can minimise your exposure to IHT, enabling you to preserve your wealth and transfer as much of your estate as possible to your loved ones. However, IHT planning can be complex, and advice should be taken to ensure the best possible position is obtained.

If you have any queries about IHT, the potential changes or how you can plan ahead please do not hesitate to get in contact with Alex Thomson, Jen Kinnear or your usual AAB contact.