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March 21, 2023updated 24 Mar 2023 9:55am

How did the Budget affect inheritance tax?

By Will Wainewright

Inheritance tax was largely left alone in the Budget, though the surprise pension measures could help pass more to the next generation 

The abolition of the lifetime allowance (LTA) on pensions contributions grabbed the headlines in last week’s Budget — which left the inheritance tax (IHT) regime in the UK largely unchanged.  

‘There had been rumours of changes to the death benefits on pensions or restricting the ability to claim business relief on AIM shares but these have escaped unscathed,’ said Jason Hollands, managing director of online platform Bestinvest, part of wealth manager Evelyn Partners.  

From the start of the new tax year next month, the tax-free allowance for IHT will be frozen until 2028 at £325,000, a figure which has not changed since 2009, according to Deloitte. There is no limit on what you can leave tax-free to your spouse. 

Mike Hodges, tax partner at Saffery Champness, says the frozen IHT threshold is ‘arguably the starkest’ example of fiscal drag.  

Peripheral changes to inheritance tax

But while there were no headline changes to IHT announced by Jeremy Hunt last week, there were a series of smaller ‘more peripheral changes that taxpayers still need to note,’ says Liz Palmer, head of private client and family at Howard Kennedy. 

IHT agriculture property relief, and charity relief are both being scaled back in scope because of Brexit. For instance, if you own agriculture property in Europe you will no longer be able to claim agriculture property relief for inheritance tax.  

Liz Palmer
Liz Palmer, head of private client and family at Howard Kennedy

‘Similarly, if you were donating to an EU or EEA (European Economic Area) charity in your will, you would expect relief from inheritance tax on death,’ says Palmer.  

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‘This relief has also been scaled back to ensure that UK taxpayers are only able to get inheritance tax relief if they support UK charities. If you want to support an EU charity you’re not going to get inheritance tax break in return. 

‘While these changes are small in the scheme of things, people may need to change their arrangement to take them into account.’ 

How pensions factor into inheritance tax

Palmer believes the abolition of the LTA is ‘not directly relevant to inheritance tax’ but could act as an incentive for people to save more into their pension plans and increase the amount of wealth that passes outside the IHT regime. 

At the moment, pensions can be passed tax-free in their entirety to the next generation if an individual dies before the age of 75. Pensions can still be passed on after that point without IHT, but the receiver will be taxed on the proceeds at their marginal rate of tax. 

It can be a question of working out if the marginal rate an individual faces will be greater than the 40 per cent standard rate of IHT, meaning advice should be taken. 

‘Pensions are not generally subject to inheritance tax when you die but there is an income tax regime that sets out to ensure a tax take,’ adds Palmer. ‘We might see more people encouraged to use pensions as an inheritance tax saving mechanism.’ 

Inheritance tax: what next?

To save inheritance tax ‘you will need to rely on the old favourites,’ adds Palmer. These include regular gifts out of income; making lifetime gifts out of capital and surviving seven years; and ensuring you capture spouse and business property relief (BPR) where it is available. 

Some savings products will invest exclusively in AIM-listed shares in smaller companies which qualify for relief from IHT.  

Experts are still debating the ins and outs of the Budget, and it is often some weeks after the headline announcements before a full detailed picture emerges. 

Her Majesty's Treasury Building, Government Offices Great George Street, Westminster, London
The Treasury is predicted to receive £3 billion more than expected in inheritance tax revenue over the next five years / Shutterstock

‘The devil will be in the detail and we will have to see whether there are any changes to the taxation of death benefits and any changes to how pensions are treated for IHT,’ adds Petronella West, CEO of London wealth management firm Investment Quorum. 

‘There could be a sting in the tail, we will have to see.’ 

What is certain is that IHT will continue to be a big money generator for the Treasury, with the Office for Budget Responsibility predicting that receipts will grow over the next four to five years by nearly £3 billion more than expected.  

‘What we now know is that this is not due to changes to the inheritance tax regime announced in the Budget and is more likely attributable to the increase in wealth passing between generations,’ says Palmer. 

Will Wainewright is the founder of hedge fund and private markets news site Alternative Fund Insight 

Cover image: Shutterstock

More from Spear’s:

What the 2023 Budget means for high earners 

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