An exploration of ‘imminent’ reforms to Inheritance Tax

With speculation that the government is to make substantial changes to Inheritance Tax rules ahead of the next general election, Matthew Pescott Frost explores the issue – and what this means for succession planning in 2023.

What could Inheritance Tax reforms mean for me? Matthew Douglas

With the Conservative Party Conference just days away, I’m hopeful that we’ll all gain some much-needed clarity on the contentious issue of Inheritance Tax. As it stands, reform is absolutely essential if the Conservatives hope to win the next general election due to the widespread unpopularity of the tax.

Fiscal drag drives disproportionate IHT payments

Inheritance Tax, or death duties, are hugely distorting the market right now. We’re seeing growing numbers of people sitting on properties they simply don’t need, all due to taxation.

With reports that the number of people liable to pay Inheritance Tax is set to soar due to the compounding effects of fiscal drag, the debate shows no signs of abating. HMRC’s thinktank IFS has claimed that scrapping the levy would effectively cost the economy almost £15 billion a year by 2032, so it’s unlikely that it will be abolished entirely – but significant reforms may well be in the pipeline and could well be imminent.

However, it’s important to note that any announced changes may not come to fruition or indeed may be reversed entirely if the party is removed from office in the next general election.

For the time-being, we can only go on what we know to be true based on current legislation.

Put money in your pension pot

If in any doubt, I’d recommend putting your money in your pension pot if this is viable for you, as this is not subject to Inheritance Tax once you pass away. However, that isn’t your only option.

Make a Will and monitor your assets’ value

It may sound obvious, but failure to make a Will and show a clear intent of how and amongst whom you’d like your assets to be divided can leave you open to the rules of intestacy – meaning you’re liable to pay entirely avoidable fees.

Make a clear Will and ensure you’re aware of the precise value of your estates and assets. This way, you’ll know exactly how much, if any, Inheritance Tax they would be subject to. The nil-rate band is currently set at £325,000 until 2026, but if you’re a married couple and your spouse passes away, you are entitled to absorb your partner’s allowance. This means you could inherit up to £650,000 worth of assets without paying any Inheritance Tax.

Invest in a Trust to remove them as taxable assets

If you place your assets into a Trust, this means that they will not form part of your estate upon your death and makes them immune to being subject to Inheritance Tax. This can still earn you income in some circumstances (such as an ‘interest in possession Trust’) so this is definitely something worth looking into if you want to safeguard your assets and your loved ones in the future.

Don’t bank on reforms happening soon

Whatever the announcement surrounding potential reforms to Inheritance Tax, there is likely to be no advantage in delaying succession planning based solely on speculation. 

For now, the rules as they stand are crystal clear but not always easy to navigate alone, so it’s essential that you seek expert advice to minimise any hidden costs or surprises that may crop up.

Get in touch with our team today to discuss the options open to you.