As we approach the Budget on October 30th, there is growing speculation about what possible tax increases could occur, particularly concerning Inheritance Tax (IHT). We take a look at the potential for a rise in Inheritance Tax in our latest article.
Inheritance Tax has long been a topic of debate due to its relatively small contribution to the government's revenue. In 2022, it brought in just £7.5 billion, which is a mere 0.7% of the total tax revenue.
To put this into perspective, raising the IHT rate from 40% to cover the much-discussed £22 billion “Black Hole” in public finances would require the rate to skyrocket to an impossible 160%!
It’s safe to say this level of increase is highly unlikely, but more modest rises, such as increasing the IHT rate to 50%, could be on the cards.
Potential Changes to the Nil Rate Band (NRB) and Residential Nil Rate Band (RNRB)
Another area that may see changes is the Nil Rate Band (NRB) and the Residential Nil Rate Band (RNRB). Currently, for a couple with a house, where everything passes to the surviving spouse on first death, estates must exceed £1 million before any IHT is due upon the second death.
However, the NRB has been frozen since 2009 and will remain so for another four years, which means many families could face higher tax bills as their assets grow over time.
Calculating the RNRB can be complex, and it starts to phase out for estates worth more than £2 million. One possible outcome in the Budget could be the removal of the RNRB in exchange for an increase in the NRB. However, it's unlikely the NRB will be increased to £500,000 per person, and even if it were, this change probably wouldn’t generate significant additional revenue for the government.
Concerns from the Agricultural Sector: Will APR Be Targeted?
Farmers are particularly worried about potential changes to Agricultural Property Relief (APR), which currently offers a 100% relief on the value of most farms.
This allows agricultural estates to be passed on to the next generation without incurring IHT. Given that even a small farm can easily exceed £1 million in value today, any changes to APR could have a significant impact.
While to non-farmers this relief may seem overly generous, removing or reducing it could force many farming families to sell or downsize their operations just to cover the IHT liability.
Over time, the effects could compound, with the size of farms potentially reducing by as much as 80% over three generations if APR were abolished.
Business Property Relief (BPR): Another Target?
Business owners enjoy a similar relief through Business Property Relief (BPR), which offers 100% relief from IHT for those who still own their business when they pass away.
As with APR, many view this as a generous provision, but removing it would likely create significant challenges for businesses and, by extension, the wider economy.
One area of BPR that could come under scrutiny is its scope. At present, there are numerous low-risk investments that qualify for BPR, and shares in companies listed on the Alternative Investment Market (AIM) also benefit.
While AIM was once considered a high-risk market, it now includes well-established companies such as Jet2, Fevertree, and YouGov, with the top 20 companies valued at £24 billion.
Removing BPR relief for AIM-listed companies might seem like a quick win for the government, but it’s doubtful that such a move would generate much additional revenue.
Conclusion
While it's clear that increasing Inheritance Tax is an option, it seems unlikely the government will make drastic changes to the tax, given its relatively small contribution to the overall revenue.
More targeted adjustments, such as tweaking the NRB or RNRB, or potentially reducing the scope of APR and BPR, may be more realistic. However, any such moves will need to be carefully considered, as they could have far-reaching consequences, particularly for farmers and business owners.
As always with the Budget, nothing is certain until the Chancellor makes his announcement. For now, all eyes remain on the potential changes and their impact on future inheritances.
For more information and advice on taxes, please do not hesitate to contact us.