The UK government is deliberating a potential reduction in the inheritance tax (IHT) before the upcoming general election, despite expectations of generating approximately £7.2 billion in revenue during the fiscal year 2023/24.
This prospective policy adjustment is just one of several announcements under scrutiny by the Prime Minister as the Conservative Party’s conference in Manchester approaches next week.
Inheritance Tax Landscape
Currently, Inheritance Tax (IHT) is levied at a rate of 40% on estates valued over £325,000, accompanied by an additional allowance of £175,000 for transferring a primary residence to offspring or grandchildren.
It is worth noting, however, that the overwhelming majority of estates in the UK do not surpass this threshold, with a mere 3.73% of deaths resulting in an IHT charge during the 2020-21 tax year.
Surge in HMRC Collections
From April to August 2023, HM Revenue and Customs (HMRC) collected a total of £3.2 billion in IHT receipts, representing a notable increase of £300 million compared to the corresponding period in the prior year.
This surge in collections was partially attributable to freezing the nil rate band at the £325,000 cap, a freeze set to endure until 2028.
Proposed Changes and Advocates
Among the existing proposals currently under review is the potential reduction of the 40% rate, with this revision slated for the March budget announcement, potentially paving the way for complete abolition in the future.
Notably, some members of the Conservative Party are staunch advocates for the complete scrapping of the inheritance tax.
However, the Labour Party has raised pertinent questions regarding the financial feasibility of such a move and its perceived equity.
Financial Implications and Critiques
The Office for Budget Responsibility (OBR) anticipates that IHT will contribute a substantial £7.2 billion to government revenues in 2023/24 and 2024/25, constituting approximately 0.7% of total receipts.
Concerns loom over the potential repercussions of this change, given the Government’s history of implementing unfunded tax cuts, which detrimentally impacted the economy just a year ago.
Critics are particularly apprehensive about the ramifications of abolishing inheritance tax, a tax paid by only 4% of households, resulting in an unfunded tax cut amounting to £7.2 billion annually.
This sum is tantamount to funding approximately 63,000 nurses, 44,000 teachers, and 41,000 police officers.
Such a move is perceived as potentially failing to benefit the majority of hardworking families, and critics have petitioned the Chancellor for clarity regarding the financing of this proposed change.
Conclusion
The UK government is contemplating significant reforms to the Inheritance Tax (IHT) system, including a potential reduction or even complete abolition of the 40% rate.
While this proposal has gained support from some members of the Conservative Party, it raises valid concerns about its financial implications, given the substantial revenue IHT contributes to the Treasury.
As discussions continue, policymakers need to consider the balance between voter support and fiscal responsibility carefully.
The future of IHT remains uncertain, and citizens and stakeholders should stay informed and engaged in this critical debate about the UK’s tax landscape.
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