Jeremy’s inheritance tax juggle
Talk of tax cuts means that an election, budget, or both are on the way. The Chancellor seems to be weighing up whether to make cuts to inheritance tax (IHT) or income tax as part of a pre-election giveaway in next week's Autumn Statement.
The Times splashed a story on Friday that Jeremy Hunt is planning to reduce the rate of IHT from 40% to 20%, or somewhere in between. This would be a much less costly option for the country's coffers than reducing income tax, as an IHT cut would affect a far smaller share of the population.
Latest statistics indicate that less than 4% of estates pay IHT; but in terms of the politics, it would obviously be aimed at shoring up Conservative support in areas where higher house prices tip estates into the IHT net. Additionally, it strikes at an emotional level across part of wider society, as many people abhor the idea of the government taxing their estate on death.
IHT is charged at 40% for an estate that exceeds the tax-free sum of £325,000, plus a further £175,000 if a residential property is left to descendants. For a married couple with a house worth £1 million and further assets worth £500,000 (and who would benefit from a combined tax-free sum of £1 million if they leave their estate to their children), their IHT bill would drop from £200,000 to £100,000, if a 50% reduction in the IHT rate was introduced.
Reducing the rate on death should also lead to a reduction in paying IHT when putting assets into trust. Currently, there's an IHT charge of 20% above the tax-free sum of £325,000 when assets are put into most trusts during someone's lifetime, and a further 20% to pay if the transferor dies within seven years. This upfront charge has had a dampening effect on people undertaking estate planning by putting assets into trust in recent years. The reasons for doing so are not always tax-driven - often it's for asset protection purposes.
Logically, reducing the death rate by 50% should also mean the lifetime rate would come down by 50% (although whoever said taxation was logical?). A side effect of a rate reduction may be that individuals are more willing to consider setting up a trust and incur a 10% charge going in, which may lead to a spike in trust creation and tax revenue from that source.
In any case, we've been here before with talk of IHT being cut or even scrapped - let's see how Jeremy's juggling turns out next Wednesday.