How Osborne plans to abolish inheritance tax

Being able to pass your Isa on to your heirs when you die is a back-door way of slashing Middle Britain’s inheritance tax bills, says Merryn Somerset Webb.

David Cameron and George Osborne would like to raise the inheritance tax (IHT) threshold to £1m. They might also harbour dreams of abolishing it altogether. But they can't. It just isn't politically possible.

Their solution is to slash the IHT bills of middle Britain via the back door. Previously announced changes to the pension rules mean that anyone with a drawdown pension can leave it 100% tax-free to their heirs if they die before 75, and IHT-free but subject to income tax on withdrawal after that.

This is remarkably generous and, as we have written before, effectively means that well-off families can create and pass down multigenerational pension trusts' free of tax. Which is nice.

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Yesterday's statement extended this to holders of annuities. Die before 75 and you can now pass on a joint or fixed-term annuity tax-free to your heirs. But that wasn't the end of it.

A hint of a new policy appeared in changes to Isa regulations. Until now, the tax advantages of your Isa wrapper have died with you so while you could pass the contents of the Isa to your spouse IHT-free, they would then have to pay income tax and CGT on those contents later.

But now the 150,000-odd married Isa savers who die each year will be able to pass on their Isa wrapper to their spouse. This is quite a tax break.

Let's say that a prudent saver has accumulated £1m in an Isa (perfectly possible). That could create around £40,000 in income a year getting it tax free means a saving of £16,000 a year to a higher-rate tax payer. Which is also nice.

It may also be the beginning of a discussion about whether Isas should now start to get the same levels of inheritability as pensions. Old Mutual's Adrian Walker reckons that the "Government should consider permitting true inter-generational sharing of Isa savings." If pensions can be passed down the generations free of IHT, why not Isas?

My guess is that Osborne and Cameron entirely agree. Yet another reason to keep those Isas topped up.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.