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Taxation Highlights in the UK - Inheritance Tax Changes on the Horizon? A Closer Look

With the UK's taxation landscape constantly evolving, it's crucial to keep abreast of the latest developments. One area that's recently garnered significant attention is Inheritance Tax (IHT). 

In this newsletter, we explore the potential changes on the horizon for IHT and provide a brief recap of its current principles.

Emerging Discussions on IHT Reform:

Recently, there's been increased speculation about potential modifications to IHT, particularly after the indication that Prime minister Rishi Sunak is considering a cut to inheritance tax ahead of the next general election. 

Some of these discussions hint at a possible reduction in the tax or even its outright abolition in the future. While the idea of a complete removal might be appealing, practical constraints indicate that such a step might not be feasible in the immediate future. The potential reduction or removal of IHT carries significant weight, especially given the projected IHT annual revenue of £8bn. Removing such a revenue stream might compel authorities to explore other avenues of wealth tax. You can find more in-depth analysis in the report issued by the Institute for Fiscal Studies (IFS).

Current IHT Principles – A Refresher:

Inheritance tax (IHT) is primarily a levy on "transfer of value", arising when a person passes away and their property, or "estate," transfers to beneficiaries. However, it can also come into play when assets are transferred during an individual's lifetime, either directly to another individual or into a trust. 

A "transfer of value" occurs where a disposition leads to a decrease in the value of the transferor's estate. 

The responsibility for IHT lies with the donor, the person transferring the assets, and the tax is calculated based on their estate. But, there are exceptions, such as when a gift given during one's lifetime leads to IHT if the donor passes away within seven years of giving the gift.

Despite its basis on the transfer of value concept, numerous transfers aren't taxed due to various exclusions, exemptions, and reliefs.  

Another key concept in the context of IHT is that of “domicile”. Individuals domiciled (and deemed domiciled) in the UK are liable to IHT tax on transfers of value, whether or not the property transferred is situated in the UK. On the other hand, individuals not domiciled in the UK are not liable to IHT on transfers of value if the property is situated outside the UK but are so liable, with certain exceptions, on transfers of property in the UK. In certain circumstances relief against UK inheritance tax may be available for equivalent taxes paid in another jurisdiction.

Transfers below the IHT threshold ("nil rate band" currently up to £325,000) aren't taxed. In certain circumstances, this band can expand if considering unused portions from a deceased spouse or civil partner. An additional band applies when a qualifying residence is left to direct descendants. Transfers above the nil rate band and which cannot benefit from exemptions are taxed at the rate of 40%.

While IHT affects only a small fraction of the public, its complexity and numerous anti-avoidance provisions make it a topic of interest, particularly among the wealthier clients of professional firms. Practitioners engage with IHT in two main areas: estate planning and compliance. Clients often seek guidance on structuring their affairs to minimize IHT. Although it's a myth that IHT is voluntary, strategies can be employed to decrease potential liability.

While the conversations surrounding IHT reforms are still in the early stages, it's of utmost importance to be ready for any potential changes. Our pledge to you is to keep you informed and to navigate, together, through any shifts in the taxation landscape. 

In the meantime please speak to your usual Statura contact should you wish to discuss the content of this document in more detail or indeed the way in which IHT might affect your personal circumstances.