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Couples could face ‘inheritance tax raid’ in Autumn Budget | Personal Finance | Finance

Pabio October 25, 2024

There are fears the Budget will cut a safeguard that allows people to pass assets on to their husband or wife without having to pay inheritance tax. Currently, under the practice known as spousal exemption, individuals can transfer unlimited assets between themselves without paying inheritance tax.

However, financial experts suggest it is highly likely that the Treasury is looking at exemptions ahead of the Autumn Budget on 30 October. Spouses collectively used the exemption to transfer assets worth £15.5bn in 2021-22; The next biggest relief was the business world. property relief – £3bn protected.

This makes it by far the most valuable tax deduction in estate planning. There are fears that this inheritance tax exemption could be restricted or even abolished as Chancellor Rachel Reeves spends cash to plug an alleged £22bn black hole in government coffers and stave off cuts to public services.

An academic-led think tank has proposed capping the amount that can be transferred tax-free between spouses at £10 million, affecting only the very wealthy, in a bid to improve the fairness of the inheritance tax system. He argues that this change is necessary because the ultra-rich can more easily use the spousal exemption to avoid inheritance tax on large assets such as businesses.

The Center for Tax Analysis (CenTax) wrote: “The main purpose of the spousal exemption is probably to ensure that the surviving spouse does not face any material change in their standard of living as a result of inheritance tax payable on the first death. .

“Surviving spouses have the opportunity to engage in further tax planning, for example through gifts to heirs or trusts; This means that the spousal exemption can be used to bypass inheritance tax entirely.

“Since accrued capital gains are also currently wiped out upon death, the spousal exemption could result in assets passing to heirs completely tax-free.”

The exemption was introduced in 1972 to ensure that widows and widowers did not face large inheritance tax bills. The main inheritance tax rate is 40 per cent, but many families, especially the super-rich, pay a lower effective tax rate because they can benefit from allowances and exemptions.

According to official figures, a family inheriting an estate worth £3 million to £4 million would pay an average effective tax rate of 25 per cent, while a family inheriting a property worth typically £10 million would pay a lower rate of 20 per cent. rate pays. CenTax found that using the spousal exemption plays a significant role in reducing a family’s average effective tax rate, especially for the ultra-wealthy.

Researchers estimate the cap would affect less than 0.1 per cent of estates (fewer than 100 deaths per year) and increase income by up to £350 million. Separately, the Institute for Fiscal Studies has proposed limiting the spousal exemption.

“One possible direction for reform would be to limit the spousal exemption to a high threshold and increase the transferable nil rate band for survivors by the after-tax amount of assets on which their spouse pays inheritance tax,” the report said.

Arun Advani, director of CenTax and associate professor at the University of Warwick, said: “We need to think about how these inheritance tax reliefs interact with each other. If the Government reduces business property relief but gives up agricultural relief, then people will buy up farmland.”

Experts warn that a spousal exemption limit could deter wealthy taxpayers from living in the UK. David Denton, tax expert at investment firm Quilter Cheviot, said: Telegram“Imposing a cap on the inheritance tax spousal exemption would generate very little revenue for the Exchequer, but would deter high net worth individuals from living in the UK, which could have a detrimental impact on the economy.”

Sarah Coles, of stockbroker Hargreaves Lansdown, said: “Setting the limit at £10 million might persuade people that it’s not something they need to worry about, but even then changing a rule that’s been around for over 50 years could make people worry. It’s the thin end of the wedge and “It may be a harbinger of a tighter title.”