Posted: 27 / 10 / 2023

Article by: Adam Jones, Senior Tax Manager

The Chancellor will deliver his Autumn Statement on 22nd November, and the usual speculation as to what may or may not be included is in full swing.

Will IHT be Abolished?

One of the hottest topics is whether or not there will be any changes to the rules for Inheritance Tax (IHT). This is a perennial favourite, probably because there has been little change to the basic principles of IHT for many years, and many see the rules as unfair and outdated.

It has been hinted that maybe IHT might be abolished altogether. Whilst IHT represents only 0.7% of the total tax collected in the UK, it is still a significant number (approximately £7.2billion), which the Chancellor can sorely do without. On this basis, it may be a stretch too far to abolish IHT immediately on this occasion. There has also been talk of reducing the rate of IHT from 40% to, say, 25% with a full abolition to follow at some point in the future. This is perhaps more doable, and it would certainly win favour amongst the Conservative ranks at a time when support and, more importantly, votes, may be needed for a general election next year.

Unwanted Side Effects?

One flip side to the coin is that the various available reliefs from IHT have given rise to a variety of investment opportunities in products specially designed to take advantage of those reliefs. The most notable is probably the AIM market. AIM listed companies will generally benefit from IHT Business Relief, meaning that they can be exempt from the tax providing conditions are met. This has certainly attracted a lot of investors to the AIM market who might otherwise have been put off by, what is generally seen as, a higher risk investment than traditional stocks and shares. Might these investors look elsewhere if IHT was taken out of the equation and what effect would that have on up-and-coming businesses, who rely on AIM investors and the overall economy?

Alternative Options

Another smaller change, which has been talked about before, is to scrap the Residence Nil Rate Band and replace it with an increase to the normal Nil Rate Band. Every person is entitled to the basic Nil Rate Band (currently £325,000), which means that the first £325,000 of their estate will be free of IHT. In addition to this, some estates will also benefit from the Residence Nil Rate Band of £175,000, meaning that, in total, £500,000 is free of IHT.

However, the rules around the Residence Nil Rate Band are complex, requiring, amongst other things, that there be a main residence which passes to a direct descendant and placing an upper limit on the size of an estate so that larger estates will not qualify. Scrapping these complex rules and simply increasing the basic Nil Rate Band to £500,000 for everyone would be a popular move with taxpayers and advisers alike.

These comments are, of course, only speculation. We will have to see what, if anything, the Chancellor is able to do, bearing in mind that his stated priority right now is to focus on reducing the rate of inflation rather than cutting taxes.