Will IHT reform in October's Statement stop you leaving your money and property to your spouse/partner tax-free ?

Editor's note: For update post-budget,and its implications, see end of text. 

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The Chancellor is up against it trying to find the extra cash she has decided is needed to fill the 'Black Hole'. This is because she has decided to upgrade its value from the original £22Bn to £40Bn in order to fund enhancements to public services, and the additional public sector union pay demands expected in 2025. Both IHT and Capital Gains taxes look like primary targets for extra revenue, and there were strong hints yesterday from government sources that Starmer had plans for ‘multiple changes’ to IHT. 

In a previous blog I predicted that IHT would be a likely target, given the block on IT, VAT and NI rate changes. I made some speculative guesses about what Reeves might do to increase revenue from IHT, which is a much-hated* tax levied on their assets when someone dies. Sadly, at least some of these predictions are now quite likely to see the light of day…

Now that the celebrated Black Hole has increased in size, and Labour have hemmed themselves in on increases to the rates** of the 3 main revenue-generating taxes, Reeves will need to do something fairly significant with both Capital Gains and IHT to fill the financial void she has created since Labour took office in July. 

Business leaders have already issued stern warnings about making the business tax environment too unfriendly by hitting Capital Gains, and thereby ‘frightening off’ entrepreneurs and investors…which leaves IHT looking like the 'softer' option for major increases.

It’s thus likely that many, if not all, of the current reliefs currently available for IHT will go. Taper relief on gifts and trusts for one's offspring are likely to disappear, and Reeves may even reduce or abolish the exemption for spouse to spouse transfers. If she goes this far, there will undoubtedly by a public outcry from so-called ‘Middle England’, who will be hit the hardest.

Such a move would also be likely to split the party down the middle, and result in a major rebellion by some more centre-leaning MPs, fearful for yet more of their better-off constituents' wrath, when it comes to the budget vote. It’s more likely that she will lower the threshold to £200k and possibly also raise the headline rate to 45% or even 50% to help fill some of the extra 'mass' she’s just added to the Black Hole.

Not a pretty prospect for anyone wanting to pass on their hard-earned wealth to their children, is it ? Definitely not something that’s likely to help Labour at the ballot box from next May onward. As reported in a previous blog, we can already see the effects of Starmer's unpopularity via local council by-election results. Since July, these are already showing a significant trend away from Labour towards the Tories, and on present performance this can only get worse for them. Hopefully the party will soon start to realise they have an electoral liability at the helm, and do something about it....

Time will tell.

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* The reason IHT occasions so much hatred in those it affects is that it represents double taxation i.e. the government taxes your income when you earn it initially, and then takes another large slice of your wealth away from your estate when you die, thus depriving your heirs of part of their rightful inheritance. As such, it is the only true 'wealth tax' that we're currently subjected to - albeit only after we're dead. 

The tax has wider implications than just reducing the value of an estate to the beneficiaries, though. 

It can, and often does, cause grieving relatives extra pain, since HMRC always insists on immediate payment. This can force the sale of the family house at a loss, sometimes even before probate has been granted, and causes extra grief and financial worry at a time when beneficiaries are most vulnerable. The tax isn't just confined to the 'very rich' nowadays either - the average house price in UK is now well above £200k, with some areas in the home counties approaching £500k, thus wiping out most if not all of the long-frozen £325k allowance. If Reeves lowers this to £200k or below, even more families with only moderate incomes will be drawn into the IHT net. Enough to make you think seriously about emigrating ? Perhaps...but be quick - Reeves may well also slap restrictions on how much of your wealth you can legally export, as 'Old' Labour once did in the those 'happy' times those of who are old enough went through in the 1970s.

** The latest rumour on budget changes which emerged yesterday was that Reeves is also planning to make changes to Income Tax itself, by freezing thresholds for the full life of this parliament (i.e to 2029, if it lasts that long!). The last government's threshold freeze was due to finish in 2028, and the change would provide an extra £7Bn over the additional 2 years of its life to help make the figures look a bit more palatable. Needless to say, controversy has already erupted as to whether this represents breaking of the manifesto promise by raising  taxes for working people.....the battle is on - expect more fireworks after October 30th - and not just on November 5th !

Update 5.11.24: The general population got off more lightly than expected in the budget, with no actual reduction in the IHT thresholds, despite a further 2-year extension to the freeze. The headline rate of 40% also stayed the same. If you have a large pension pot you were planning to leave to your relatives, however, you'd be well-advised to get it spent before you go, since it will now be subject to IHT when you die. The big losers this time, of course, were the family farmers, who now get IHT applied to their estates on everything valued above £1M when they die. This has already caused an outcry in the industry, and confirms that Labour are remaining true to their instincts in despising anything rural, despite the pressing need to improve our food self sufficiency in this crowded little island, which is becoming more and more dependent on imports. I suspect we'll lose quite a few of our small family farms between now and 2029....

First Published 18.10.24