Will Labour’s inheritance tax revamp be a tax grab or genuine reform? - IFA Magazine

Rachael Griffin, a specialist in tax and financial planning at Quilter, recently shared her thoughts on news that the government intends to boost its revenue from inheritance tax during the upcoming Budget.

She remarked, "Inheritance tax (IHT) is widely disliked in the UK and is often considered unjust. Those with vast wealth usually sidestep this tax by employing tax professionals to help them take advantage of the intricate system of deductions and exemptions. As a result, most of the yearly £7 billion collected comes from affluent individuals, primarily because they have put in the effort, saved, and invested wisely over the course of their lives."

Inheritance tax (IHT) stirs strong feelings for numerous individuals. The unchanged thresholds have resulted in an increasing number of taxpayers grappling with a maze of constantly changing tax laws and rules. In truth, IHT has long needed a revamp and streamlining, as it is cluttered with complex and unnecessary details that require careful examination.

It’s important to remain optimistic that any changes proposed by Labour will genuinely address these problems, instead of just making a quick cash grab by cutting the £325,000 threshold for inheritance tax. The Conservative Party, led by Rishi Sunak, hinted at the possibility of either reducing or even eliminating inheritance tax to attract voters. If Labour's proposed changes come across as an impulsive way to collect more tax, they could face strong opposition. It’s crucial for policymakers to approach inheritance tax reform thoughtfully, rather than treating it merely as a political strategy or a means to increase revenue.

The Labour Party has been considering changes to various tax reliefs, including those for agriculture and business properties. They are contemplating the possibility of limiting, redefining, or even eliminating these benefits. This could lead to AIM shares losing their inheritance tax exemption. Such a decision would appear contradictory for a government aiming to foster growth and encourage investment in UK assets.

The established nil rate band is a key aspect of UK inheritance tax (IHT) laws, allowing for the first £325,000 of a person's estate to be exempt from tax when they pass away. However, the residence nil rate band (RNRB), introduced by George Osborne, introduces added complexity and is often confusing. This additional allowance can reach up to £175,000 per individual, but it comes with a requirement known as a 'qualifying residential interest.' Essentially, this means that the individual must own a residential property that has been used as their home at some time.

While it may not matter to everyone, heritage property can lead to significant savings in certain cases, often enabling estates to be handed down to future generations intact. Specific buildings, land, and artworks can qualify for exemptions from inheritance tax if they fulfill strict criteria, such as having exceptional historical significance, architectural value, or natural beauty.

If the claims are accurate and Labour decides to make inheritance tax more severe, they might also look at updating the rules around gifting. By streamlining the inheritance tax system and raising the annual exemption for gifts, it could become easier for families to transfer assets and share their wealth while they are still alive. Increasing the amount that can be gifted without tax would promote transferring wealth sooner, which could lessen future inheritance tax burdens and possibly stimulate consumer spending.