IFS Proposes Inheritance Tax Overhaul: What Could It Mean for You?

Amidst talks of a Conservative plan to revamp the inheritance tax (IHT) system, including discussions about reducing or scrapping the tax to gain voter support ahead of the upcoming general election, the Institute for Fiscal Studies (IFS) has announced a proposal for a significant overhaul of the IHT system in the UK. With the aim of simplifying the existing framework and potentially reducing the tax burden on some, the IFS has recommended various reforms, including a joint allowance of £1 million for married couples. This proposed shake-up could have far-reaching implications for taxpayers and estate planners alike.

Neal Groves, Client Partner and Personal Tax specialist at Beavis Morgan, shares his insights on the potential changes, highlighting their impact and implications.

The IFS’s bold proposal:

The IFS’s proposal seeks to address some of the complexities and criticisms surrounding the current inheritance tax system. One of the key recommendations is the introduction of a joint allowance of £1 million for married couples, which would effectively double the existing allowance. This would undoubtedly benefit couples looking to pass on their wealth to the next generation, as it could significantly reduce the inheritance tax liability for many families.

According to the IFS, the UK government is expected to collect a staggering £15.3 billion worth of inheritance tax by 2033 under the current system. Surprisingly, the think-tank suggests that the government could potentially lower the inheritance tax rate to 32% while still maintaining the same expected revenue. This reduction could provide relief to those who are currently subject to the tax.

However, it’s important to note that while only 4% of estates currently pay inheritance tax, the IFS predicts that approximately one in eight people will face an inheritance tax bill within the next decade. This is a significant increase and highlights the urgency of addressing IHT reform.

The Treasury’s response:

In response to the IFS’s proposal, the Treasury has defended the current inheritance tax levy, emphasising that over 93% of estates will have zero inheritance tax liability in the coming years. This statistic reflects the various exemptions and reliefs available under the existing system, which are designed to reduce the tax burden on many estates.

However, the IFS argues for the removal or capping of certain exemptions, such as business and agricultural relief. Additionally, they suggest including 80% of bequeathed pension pots in taxable estates. These changes are intended to address the perception that current exemptions disproportionately benefit individuals with substantial portfolios.

Neal Groves, Client Partner and Head of Personal Tax at Beavis Morgan, comments:

Neal Groves, a seasoned expert in personal tax planning, comments: “The IFS’s recommendations represent a significant departure from the current inheritance tax landscape. While the proposal for a joint allowance of £1 million for married couples could be a welcome relief for many families, it’s crucial to consider the potential consequences of removing or capping certain exemptions, such as business and agricultural relief. These exemptions have historically supported specific industries and family-owned businesses.”

He continues: “Estate planning is a complex and deeply personal process. Any changes to the inheritance tax system must strike a balance between simplification and maintaining support for sectors that rely on these reliefs. Furthermore, including a substantial portion of bequeathed pension pots in taxable estates could impact retirees and their beneficiaries significantly. It’s essential for individuals and families to stay informed about these potential reforms and adapt their estate plans accordingly.”

Conclusion – How Beavis Morgan can help?

The IFS’s proposal for an inheritance tax overhaul has ignited a debate about the future of wealth transfer in the UK. While the idea of a joint allowance for married couples and a potentially lower tax rate may offer some relief to taxpayers, the removal or capping of certain exemptions could have significant implications, especially for business owners and individuals with substantial assets.

As the discussion surrounding inheritance tax reform continues, it is essential for individuals and families to stay informed about these potential changes and consult with tax professionals and estate planners to adapt their strategies accordingly. Estate planning is a crucial aspect of managing one’s financial legacy, and understanding the evolving tax landscape is key to making informed decisions about the future.

Our tax experts at Beavis Morgan are available to aid in navigating the complexities of the proposed inheritance tax reforms. We specialise in personal tax planning and estate management, ensuring that you are well-prepared for any changes to the tax landscape. To discuss your specific needs and explore tailored solutions, don’t hesitate to contact Neal Groves or your usual Beavis Morgan Client Partner. Your financial peace of mind is our priority.