The Budget – and Inheritance Tax… What can we expect?

By Katie Hanson, Legal Services Director, Prestige Legal Services

As we approach the upcoming Budget announcement on 30 October, there is significant anticipation surrounding potential changes to the UK’s tax regime, including Inheritance Tax (IHT). For our associates, who provide estate planning services and Will drafting support, it is essential to stay informed about these developments and understand how they may impact your clients and business. Here, I’ll outline the context and speculate on possible changes.

The State of Play: Why Inheritance Tax is Under Review

Inheritance Tax is currently charged at 40% on the value of an estate exceeding the £325,000 threshold. Although it contributes approximately £7bn annually to the Treasury, only about 4% of estates are subject to IHT due to various reliefs and exemptions.

Given the government’s need to address a considerable fiscal deficit – some reports suggest a shortfall of up to £40bn – it’s no surprise that IHT is under scrutiny. The Chancellor, Rachel Reeves, has warned that “tough decisions” will be required to balance the books, which likely means adjustments to existing tax rules.

Possible Changes on the Horizon

While we won’t know the full details until the Chancellor’s address, here are some areas of potential change that have been hinted at:

  1. Reduction or Removal of Exemptions and Reliefs
    There is speculation that several existing exemptions may be scaled back or removed entirely. Currently, exemptions include annual gifts of up to £3,000, wedding gifts, and regular gifts out of surplus income. Additionally, gifts made more than seven years before death are generally free from IHT. Any tightening of these rules could mean more estates fall within the scope of IHT.

Reliefs for specific assets, such as Business Relief (which allows certain business assets to be passed on free of IHT) and Agricultural Relief (applicable to farmland), may also be revised. Changes to these reliefs could have a significant impact on clients involved in family businesses or agricultural enterprises.

  1. Freezing or Lowering the Nil-Rate Band
    The nil-rate band, set at £325,000 since 2009, could either be frozen for a longer period or reduced. Freezing the threshold amidst rising property prices effectively increases the tax burden on more estates. The government may also consider changes to the additional Residence Nil-Rate Band (RNRB), which allows an extra allowance if the deceased’s home is left to their descendants.
  2. Adjustment to the Tax Rate or Introduction of a Tiered System
    There is also a possibility of modifying the 40% tax rate. Some discussions suggest the introduction of a tiered IHT rate system, where larger estates face higher rates. For example, estates over a certain value could be taxed at 45% or even 50%, increasing the potential tax take.

Implications for Estate Planning and Will Drafting Services

Changes to IHT will inevitably create uncertainty and anxiety for clients, particularly those with larger estates or complex asset structures. It is vital to be proactive in communicating potential implications and advising clients on how to structure their estate planning.

Here are a few steps you can take:

  1. Review Client Wills and Estate Plans
    Ensure that your clients’ Wills and estate plans are up to date, especially if changes to IHT rules may significantly alter their tax exposure. This is particularly important for clients relying on business or agricultural reliefs, or those who have made substantial gifts in the past seven years.
  2. Consider Trust Structures and Lifetime Gifting
    While lifetime gifting is currently a popular strategy to reduce IHT exposure, it may be prudent to reassess this approach if changes are introduced. Trust structures could also become more or less favourable depending on any adjustments to the seven-year gifting rule.
  3. Communication and Education
    Keeping your clients informed will help to mitigate any concerns and allow them to take timely action if needed. Be prepared to discuss potential scenarios and plan contingency strategies. Hosting webinars or sending out informative newsletters can be an effective way to keep clients up to date.
  4. Monitor the Budget Announcement
    It is crucial to stay tuned to the Chancellor’s Budget speech and subsequent analysis. Once the details are confirmed, you can provide tailored advice to clients on the specific measures introduced and how to adjust their estate plans accordingly.

Preparing for a “Fixing the Foundations” Budget

The forthcoming Budget is being billed as “Fixing the Foundations to Deliver Change,” signalling the government’s intention to reshape fiscal policy significantly. The Chancellor is expected to outline a comprehensive plan to address the perceived “black hole” in public finances, and IHT changes will likely be a part of this effort.

Associates should be prepared for a Budget that prioritises revenue generation while aiming to appease various sectors. As the government balances between raising taxes and maintaining electoral appeal, Inheritance Tax provides a substantial yet politically sensitive revenue stream. Therefore, it is likely that any changes will be carefully framed, potentially with a phased approach to avoid immediate shock to affected families.

What Next?

We are committed to keeping you updated on the latest developments and providing the tools you need to support your clients effectively. In the meantime, ensure that your clients understand the current rules and potential risks and be prepared to make swift adjustments following the Budget.

Should you have any questions or need specific advice on a particular client case, please do not hesitate to contact our team. We are here to support you as these changes unfold, ensuring that your clients’ interests are protected and their estate planning remains robust.