With Labour’s first Budget set to be delivered on 30 October, rumours are swirling that the new government may be preparing to ransack your family’s wealth, especially through changes to Inheritance Tax (IHT). As a business owner, property owner, investor, or someone with valuable assets, you must pay close attention to what could be coming next.
For decades, inheritance tax has been a controversial topic in the UK. It’s one of those taxes that has the potential to hit ordinary families hard, especially those who’ve worked their entire lives to build up a nest egg, purchase property, or pass on a family business. The current system offers a few ways to mitigate the impact, but if Labour enacts the sweeping changes many predict, it could severely limit your ability to pass on wealth tax efficiently.
In this article, I’ll summarise the current IHT rules, what might change under Labour’s government, and how these changes could affect you. Plus, I’ll outline a few simple strategies you can adopt to protect your wealth from the taxman’s clutches.
Understanding the Current IHT Rules
Inheritance tax is currently charged on estates worth more than £325,000 at a rate of 40%. This threshold is known as the “nil-rate band.” Any estate worth up to this amount can be passed onto your beneficiaries without being subject to IHT. However, anything above £325,000 is taxed at 40% when your estate surpasses this figure.
An additional “residence nil-rate band” (RNRB) is available for homeowners. This provides an extra £175,000 in allowance for passing on a main residence to your direct descendants, like children or grandchildren. This means that, for a married couple or civil partners, a total of £1 million can be passed on without facing IHT, provided their estate includes their home. Eligibility for the RNRB starts to be lost when the estate is worth over £2m.
Key Reliefs and Exemptions
- Business Relief: If you own a business or shares in certain companies, your estate may benefit from Business Relief, which can reduce the value of business assets for IHT purposes by 50% or even 100%.
- Gifts: You can gift up to £3,000 per year tax-free (known as the annual gift allowance), and larger gifts can become IHT-free if you survive for seven years after making them.
- Charitable Donations: If you leave at least 10% of your estate to charity, your estate will benefit from a reduced IHT rate of 36%.
These reliefs provide some much-needed flexibility for wealthier individuals seeking to mitigate their IHT exposure. However, the big question on everyone’s mind is: how long will these rules last under a Labour government?
What Could Labour Change?
The Labour Party has made no secret of its ambition to raise taxes on wealth, and inheritance tax could be a key target in the upcoming Budget.
In its March 2024 Economic and Fiscal Outlook, the Office for Budget Responsibility forecasted that taxes raised from IHT in 2024-25 would be £7.5 billion, which equates to only 0.3 per cent of national income. This represents a tiny amount of the tax paid to HMRC and could give Labour a massive incentive to use IHT to generate more tax for the public purse.
Here’s what I believe might happen:
- Lowering the Threshold
Labour could decide to lower the nil-rate band from £325,000 to a lower figure. This would mean more estates would be pulled into the IHT net. For example, a reduction to £250,000 would ensnare a much broader section of middle-income families, particularly those who own homes in London and the Southeast, where property prices have risen dramatically.
- Cutting the Residence Nil-Rate Band
The additional allowance for passing on a family home to children or grandchildren could also be on the chopping block. If the RNRB were scrapped or reduced, even more estates would become subject to the 40% IHT rate.
- Reducing Business and Agricultural Property Relief
Business owners and farmers will likely be hit hard if Labour reduces or eliminates Business Relief or Agricultural Property Relief. This could be catastrophic for family-owned businesses and farms/estates, which could be forced to sell off assets or liquidate altogether to pay hefty tax bills. Labour might view this relief as a loophole that benefits the wealthy, even though it plays a crucial role in ensuring that family businesses and farmers can survive from one generation to the next.
- Increasing the Tax Rate
Labour may also increase the IHT rate, pushing it above the current 40%. This could be justified as part of their broader agenda of wealth redistribution, but it would have a devastating impact on family wealth planning, particularly for high-net-worth individuals and those with substantial property portfolios.
How Labour’s Changes Could Affect You
If Labour implements any combination of these changes, the consequences could be dire for families and business owners across the UK. Middle-income households, particularly those whose main asset is their home, will find themselves facing unexpected and substantial tax bills. Family-run businesses could be forced to liquidate just to pay the IHT, and wealthy individuals may find that their long-standing plans to pass on wealth in the most tax efficient manner are no longer feasible.
The effects of these changes will extend beyond the ultra-rich; small and medium-sized businesses, families with modest property portfolios, and those who’ve saved and invested diligently could feel the brunt of the blow.
What Can You Do?
While we can’t predict with certainty what Labour will announce in the Budget, the prudent course of action is to start planning now. There are a few steps you can take to protect your wealth:
- Making or updating your Will—Having an up to date Will is one of the most effective ways to transfer wealth and ensure your assets are passed onto your intended beneficiaries.
- Gifting: Use your annual gift allowance and consider gifting larger sums while the seven-year rule is still in place.
- Trusts: Trusts can be an effective way to remove assets from your estate and manage how they’re distributed, potentially reducing your IHT liability.
- Maximise Reliefs: Ensure you’re fully utilising the current reliefs, such as Business Relief and the residence nil-rate band, while they’re still available.
- Consult a Professional: Inheritance tax planning is complex, and with potential changes on the horizon, now is the time to get professional advice. At Michael Filiou Ltd, we offer a free consultation to help you navigate these challenges and protect your family’s wealth.
In summary, Labour’s proposed changes could lead to significant hikes in inheritance tax liabilities. While the current rules still apply, taking action now is the best way to safeguard your family’s financial future. Get in touch today at 01707 665533 or email hello@michaelfiliou.com to arrange a free IHT consultation. Let us help you preserve what’s rightfully yours.
