There have been reports that inheritance tax exemptions could be reformed in this month's Budget as the chancellor looks for tax-raising measures.
According to the BBC, the government is planning to increase the amount of money it raises in IHT with changes to exemptions.
Recent research from Hargreaves Lansdown found one in 20 people said losing inheritance tax exemptions was their biggest tax fear in the Budget. This rose to one in 10 among retired people.
Under current rules, pensions can be left free of IHT and Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said the government could remove this exemption altogether or place a limit on it.
“This would mean it’s treated similarly to other savings and investments for retirement, including Isas,” she explained.
“The government may consider it low-hanging fruit, which is why this particular rumour has been aired more than once in the past few months. This change would be a blow to anyone planning to pass on their pension wealth to other family members.
“It would also spur people to spend their pension while they are still alive, whether that be through more gifts to loved ones or through extra spending.”
According to figures from HM Revenue & Customs, in 2021-22 a record £5.99bn was paid in inheritance tax – up £230mn in a year.
Some 4.39 per cent of deaths led to an inheritance tax bill – up 0.66 percentage points since 2020-21 and the highest proportion since 2016-17.
There were also 27,800 taxpaying estates – up by 800 in a year.
Figures also found £15.5bn was transferred tax-free to spouses and civil partners during 2020-21, which Hargreaves Lansdown said makes it the largest IHT tax break on the books.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said if this exemption was changed then instead of the surviving partner being able to give away up to £1mn free of inheritance tax, they might be limited to £500,000.
“The hope is that because this is such an essential exemption, the government will be wary of making a change that causes potential hardship to so many, and could lead to people being forced to sell their home to pay an inheritance tax bill,” she said.
Another exemption is business property release, which protects the assets in family businesses, allowing them to be passed on free of inheritance tax.
There is also agricultural property relief, which applies to all sorts of assets on family farms, enabling them to be passed down the generations.
The combined value of agricultural and business property relief was £4.4 billion – up 5 per cent in a year.
Coles said: “There have been discussions as to whether business property relief could become less generous. It might squeeze business property relief by limiting the assets it applies to, increasing the minimum holding period (possibly from two years to five years), capping the maximum or reducing the level of relief. However, this could affect investors in qualifying AIM companies, which are currently inheritance tax-free after two years.”
