Liz Truss commits to IHT review in build up to leadership vote

Conservative leader hopeful Liz Truss has vowed she would oversee a review of inheritance tax (IHT) should she win the party’s leadership contest and become the next Prime Minister.

Such a move would follow a record period for IHT, after HMRC earlier this year reported a 14% increase in IHT receipts worth £729m between the 2020/21 and 2021/22 financial years – a rise that took total IHT receipts received by the government to £6.1bn.

This increase in 2021/22, according to HMRC, was likely due to a combination of the knock-on effects of the COVID-19 pandemic on the volume of wealth transfers and IHT-liable deaths in recent years, as well as continued rises in asset values.

As reported by The Telegraph, Truss made a pledge to review the current IHT system when being questioned at a Conservative party hustings in Leeds last week, should she beat Rishi Sunak in the contest to replace Boris Johnson as the next Conservative leader.

Speaking exclusively to MoneyAge, tax partner at Evelyn Partners, Julia Rosenbloom, discussed the likelihood of any IHT reform and highlighted that Truss has to date focused a lot on tax reductions, including a reversal of the intended corporation tax increase in April 2023.

“It is not inconceivable that Truss could take steps to increase IHT revenues to balance out some of the tax reductions in other areas,” Rosenbloom said.

“As the former Chancellor, it may be tempting to take the view that Sunak’s approach to tax policy as Prime Minister would be predictable and unchanged from the current track, and that, having rejected the recommendations for IHT reform made by the Office of Tax Simplification (OTS) in November 2021, IHT changes are unlikely. However, moving next door to Number 10 would bring additional freedoms and powers and revisitation of IHT reform should not be ruled out.

“In both cases though, only time will tell and people should consider their IHT position and take advantage of the current reliefs and planning opportunities.”

According to the latest HMRC figures for this year, the government’s IHT intake has reached £1.8bn between April and June, a total around £300m higher than in the same period in 2021.

The standard IHT rate, which is 40%, is only charged on the part of an estate that is above the tax threshold. However, with the nil rate band and residence nil rate band frozen until at least April 2026, the current rise in IHT receipts is likely to continue.

“Whilst IHT receipts have been increasing, this is primarily due to the fact that the nil rate band has not increased in line with, in particular, property values,” Rosenbloom commented. “Consequently, more people have been drawn into the IHT net. 

“Where inflation results in an increase in asset values, the IHT revenues will correspondingly increase, especially if the nil rate band remains behind inflation – it is currently £325,000 and has been frozen at this level until at least April 2026.

“Conversely though, with the increasing cost of living, people have less money available to invest for the future, which reduces the overall wealth of the nation and could correspondingly bring IHT revenues down.”

With rising inflation, which latest Office for National Statistics data shows is sitting at 9.4% in the 12 months to June, increasingly dragging more people into the IHT net, Rosenbloom also highlighted the potential areas of IHT reform that either Truss or Sunak could turn to, after the winner of the Conservative leadership election is announced on 5 September.

She told MoneyAge: “Potential reforms to IHT could include a charge on lifetime gifts, over a certain value, or an overhaul of the way business reliefs operate. Currently, qualifying businesses are exempt from IHT through Business Property Relief and the value of the relief is £1.9bn.

“Reforms of this kind could increase the IHT intake. The impact on family businesses could be severe if this were to happen and some would not survive the tax liability.

“This makes it especially important that family businesses review their affairs now to ensure onward succession.”

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