Prime minister Rishi Sunak is mulling a cut to inheritance tax (IHT) rates ahead of the next general election, according to reports, in a move that could see fewer people paying the unpopular levy.
As it stands, the standard IHT rate is 40%, payable on parts of the estate that exceed the £325,000 threshold.
But, reports suggest that the government is seeking to potentially reduce the headline rate payable or even raise the £325,000 threshold at which the tax is currently paid, according to reports by Bloomberg.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
It reported ministers saying the proposal could be a “pre-election giveaway”, designed to galvanise support from potential voters.
YouGov found that 63% of people support the inheritance tax threshold being upped - a move backed by 77% of Conservative voters.
The Treasury did not confirm or deny the rumours, saying it was unable to comment on speculation around tax changes outside of fiscal events.
Chancellor Jeremy Hunt froze the IHT threshold for two years in the latest Autumn Statement. But, since the £325,000 IHT threshold for individuals was set in 2009, it would be no surprise if this went up.
It’s a policy move that has been touted previously. Former prime minister Liz Truss pledged to oversee a review of IHT during the Conservative leadership contest in August last year - plans which did not materialise.
Who pays IHT?
The number of people who actually pay inheritance tax is very small, but every year more people fund themselves dragged into the net. According to the latest government statistics, only 3.76% of deaths in the tax year 2019 to 2020 resulted in an IHT charge - a total of 23,000 deaths. IHT receipts received by HMRC during the financial year 2021 to 2022 hit £6.1 billion.
In March, the Office for Budget Responsibility (OBR) upped the Treasury’s forecast for its IHT intake, projecting £45bn in inflows over the next six years - an increase of £2.9bn compared to the OBR’s previous statement in November.
The OBR forecasts that by 2027/28, 6.7% of deaths will trigger an IHT charge.
What is the IHT rate?
Inheritance tax is currently charged at 40% of a person’s estate above a tax-free allowance, but a reduced rate of 36% is triggered should the deceased leave a minimum of 10% of their assets to charity in their will.
You also don’t need to pay IHT if you leave your estate – or everything above the £325,000 threshold – to your spouse, civil partner, a charity or community amateur sports club.
Those with children or grandchildren that leave the family home to them benefit from what is known as a residence nil-rate band, which boosts the £325,000 allowance to £500,000. This means a couple could leave up to £1m IHT-free to their kids or grandchildren.
Can I reduce my IHT bill?
There are several ways to cut your IHT bill by gifting, which includes:
- Gifting up to £3,000 each year. This is called the ‘annual exemption’ and if you didn’t use your allowance last tax year you can also carry this allowance forward – so, you can make £6,000 as a gift.
- You are allowed to make gifts of up to £250 to as many people as you like if you haven’t made any larger gift to that person
- Each year the rules allow you to give a lump sum to someone getting married or starting a civil partnership. For children, you can give £5,000, for grandchildren and great-grandchildren the allowance is £2,500 and then £1,000 to anyone else.
We explain how to reduce your IHT bill by gifting in detail in our article on how to reduce your IHT bill by gifting.
There are a number of other ways reduce your IHT bill, but these can sometimes be complicated and it is always worth speaking to a financial planner to make sure your loved ones do not pay any more tax than they have to.
-
Tycoon Truong My Lan on death row over world’s biggest bank fraudProperty tycoon Truong My Lan has been found guilty of a corruption scandal that dwarfs Malaysia’s 1MDB fraud and Sam Bankman-Fried’s crypto scam
-
Why undersea cables are under threat – and how to protect themUndersea cables power the internet and are vital to modern economies. They are now vulnerable
-
Act now to bag NatWest-owned Ulster Bank's 5.2% easy access savings accountUlster Bank is offering savers the chance to earn 5.2% on their cash savings, but you need to act fast as easy access rates are falling. We have all the details
-
Moneybox raises market-leading cash ISA to 5%Savings and investing app MoneyBox has boosted the rate on its cash ISA again, hiking it from 4.75% to 5% making it one of top rates. We have all the details.
-
October NS&I Premium Bonds winners - check now to see what you wonNS&I Premium Bonds holders can check now to see if they have won a prize this month. We explain how to check your premium bonds
-
Bank of Baroda closes doors to UK retail bankingAfter almost 70 years of operating in the UK, one of India’s largest bank is shutting up shop in the UK retail banking market. We explain everything you need to know if you have savings or a current account with Bank of Baroda
-
How to earn cashback on spendingFrom credit cards and current accounts to cashback websites, there are plenty of ways to earn cashback on the money you spend
-
John Lewis mulls buy now, pay later schemeThe CEO of John Lewis has said the retailer will consider introducing buy now, pay later initiatives for lower-priced items.
-
State pension triple lock at risk as cost balloonsThe cost of the state pension triple lock could be far higher than expected due to record wage growth. Will the government keep the policy in place in 2024?
-
Paragon raises rate on one-year fixed cash ISA to 5.75%Paragon Bank ups its one-year fixed cash ISA rate to 5.75% - is it enough to top the table?
