Inheritance tax rate cut would benefit the super wealthy – AJ Bell

by | Nov 16, 2023

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Laura Suter, head of personal finance at AJ Bell, comments on potential inheritance tax rate cuts.

She said: “It wouldn’t be a fiscal update without numerous rumours and leaks in the week ahead – and this year’s Autumn Statement is no different. Fresh off the back of clinching its inflation reduction target, it appears thoughts have immediately turned to how the government could cut taxes next week. 

“Just this morning JP Morgan estimated that there might be as much as £10 billion down the back of the Treasury’s sofa to spend on tax cuts, and the rumour mill is already in full flow of how that money could be spent. But any move by the government to hand money back to the public needs to avoid starting the inflation engine up once again. A decision to cut inheritance tax meets this criteria as it would offer a good incentive for people to save money in their estate, rather than spend it. 

 
 

“We don’t know if these plans will come to light or what rate cut the government might land on, but any headline rate cut would benefit larger estates enormously. A decision to cut the headline rate from 40% to 35% would save an estate worth £1.5 million a total of £25,000 in tax, in comparison to the £467,500 it would save an estate worth £10 million*. A much larger rate cut to 20% would net an estate worth £1.5 million a tax saving of £100,000 but a tax saving of £1.87 million for estates worth £10 million. 

“The Treasury is already on track to have a record-busting year when it comes to IHT receipts. It collected almost £4 billion in inheritance tax revenues in the first half of the tax year, an increase of £400 million compared to the same time last year, meaning it’s on track to beat the previous annual record of £7 billion. To put those figures in context, more IHT has been paid in just six months than was paid in the entire year a decade earlier. This itself has given the government a bit of wiggle room to cut the tax or tinker with the thresholds, as rising asset prices and inflation have helped to fuel receipts in recent years.”

Impact of headline inheritance tax rate cut on various estate sizes
Estate valueCut to 35%Cut to 30%Cut to 20%
£1,500,000£25,000£50,000£100,000
£2,000,000£50,000£100,000£200,000
£3,000,000£117,500£235,000£470,000
£4,000,000£167,500£335,000£670,000
£5,000,000£217,500£435,000£870,000
£10,000,000£467,500£935,000£1,870,000
Source: AJ Bell. Assumes that a couple each have their full allowances available and that the Residence Nil Rate Band is applied up to estates worth £2 million, when it is tapered. Also assumes no other allowances are applied.

How does cutting the rate of IHT compare to raising the nil rate band threshold?

 

“When it comes to cutting taxes governments have two options – lower the rate of tax or raise the threshold at which you start paying it. The IHT threshold has been frozen in time since 2010, while the residence nil rate band is also unchanged since it was phased in from 2017-20.

“The simple way to cut IHT bills would be to raise the threshold to reflect inflation. A decision to instead cut the headline rate of inheritance tax from the current 40%, rather than change the threshold at which an estate has to pay inheritance tax, would be at odds with what many had expected. 

“By freezing the threshold but cutting the headline rate the government is taking with one hand and giving with the other. If the IHT thresholds had been increased with inflation, rather than been frozen, the nil rate band would stand at £499,000 from April 2024, rather than £325,000. If the government had also increased the residence nil rate band by inflation since its introduction, a couple would be able to leave an estate worth just over £1.4 million without paying inheritance tax from April next year.

 

“A move to cut the headline rate rather than raise the threshold is more beneficial the wealthier you are, whereas raising the tax threshold to compensate for inflation would benefit a £1.5 million estate as much as a couple with £10 million to their name. 

“If thresholds are kept frozen but the headline rate is cut, for an estate worth £1.5 million the headline rate of inheritance tax would need to be slashed to just 6% to equate to the same tax saving as uprating thresholds with inflation*. Clearly that kind of cut to the IHT rate is unlikely to happen. 

“For a £2 million estate the rate would need to be cut to 23% to equal the same tax bill as just uprating thresholds with inflation, while for a £5 million estate the headline rate would only need to be cut to 37% to equate to the same tax saving as raising thresholds.”

 

*Assumes the estate is formed of a couple who each have their full nil rate band available and both can use the Residence Nil rate Band, up to estates worth £2 million when it starts to be tapered. Assumes that no other allowances are applied.

IHT rate needed to make up for frozen threshold
Estate valueRate of IHT
£1,500,0006%
£2,000,00023%
£5,000,00037%
Source: AJ Bell. Assumes that a couple each have their full allowances available and that the Residence Nil Rate Band is applied up to estates worth £2 million, when it is tapered. Also assumes no other allowances are applied.
IHT threshold in 2024Nil rate bandResidence nil rate bandTotal for couples
Actual IHT thresholds in 2024£325,000£175,000£1 million
If the government had uprated the nil rate band with inflation since 2010 £499,000N/A£998,000
If the government had uprated the nil rate band and residence nil rate band with inflation£499,000£213,000£1.423 million
Source: AJ BellIHT nil rate band uprated 2010/11-2024/25 in line with the previous year’s September CPI inflation figure. Residence nil rate band uprated from April 2021, having been set at £175,000 from 2020. Figures rounded to the nearest £1,000.

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