Around two weeks ago, Prime Minister Rishi Sunak hinted that the next general election – initially predicted to take place in May – would take place in the second half of 2024. 

This might be a welcome relief for some people – an additional grace period before agendas, initiatives, and promises are being thrown around left, right and centre, and financial plans are going to be spun out of axis. 

This is already foreseeable when it comes to inheritance tax. Being an inherently controversial subject, inheritance tax is set to become a key part of party campaigns, with both Starmer and Sunak seemingly at odds on how it should move forward.

If you are currently in the midst of inheritance tax planning – or know that you will need some independent financial advice on the subject very soon – it’s first important to get an idea of how it is going to be used in the election. What exactly is going to happen to the inheritance you leave behind, and what changes might be made in the near future?

The Pre-Election Giveaway

In the summer of 2023, the Telegraph launched a campaign to scrap inheritance tax, and shortly after, 50 Conservative MPs similarly called for abolishment. This has since been described as a ‘pre-election giveaway’.

For a while, it has been rumoured that rather than re-amend inheritance tax, the Conservatives would scrap it entirely, losing out on £7 billion in HMRC revenue but saving the tax-payer from the 40% tax rate. This tax rate, however, becomes payable above the threshold of £325,000. For a lot of people, inheriting this amount of money isn’t a reality. This was proved back in 2020/21, when less than 4% of deaths resulted in inheritance tax. So why get rid of it?

Future Increase in Inheritance Tax

The Conservatives will undoubtedly point to the future. While the figure for total inheritance tax paid is relatively small – as mentioned before, it brings in £7 billion for the UK government – the figure is set to go up over time. 

Due to inflation and rapidly rising house prices, offspring of the ‘baby boomer’ generation are likely to see an almost 100% increase in inherited wealth over the next two decades, placing them over the threshold of tax-free inheritance

Add to this that, in a YouGov poll, only 20% of people called inheritance tax fair, and it becomes clear why it will be used as ammunition in the election campaigns. Losing £7 billion wouldn’t have a huge impact on the government. People don’t seem to like it. Why not tear up the script?

The Bigger Picture

Well, because so many people – even very wealthy people have ways to minimise IHT through effective estate planning. Take a look at the allowances and reliefs. While the effective threshold is £325,000, there is a £175,000 allowance for residential properties given to direct descendants. As well as this, any unused portions of tax-free thresholds can be passed to surviving spouses or civil partners, and any small businesses and farm businesses can be passed down to future generations. 

With a bit of savvy financial advice, estates can be taxed significantly less than the current threshold would have you believe. This means abolishment would only serve those with a substantial amount of wealth. Taking away £7 billion per year would also mean raising other taxes or cutting spending, which would ultimately affect the average earner. 

Reliefs and Allowances

In labour’s view, the answer isn’t cutting inheritance tax, but cutting reliefs and allowances. This would keep the £7 billion coming into the government while adding around £4 billion on top of it. 

But once again, this would not cost the wealthiest of society. It would destroy the shields of farming and family businesses – making them subject to the 40% inheritance tax – and further discourage business owners in the UK. No one wants to force the next generation to take on a huge amount of debt to cover tax burdens, but this is exactly what the supposed plan could lead to. 

Preparing for the Future

With all this being said, it seems that there is no clear answer about how inheritance tax should be handled. This makes professional inheritance planning all the more important, especially for those who are currently working through their inheritance. Nobody knows what the outcome will be after the election – or if there will even be an outcome – but with a financial advisor, you can keep your finger on the pulse and make sure you’re ready.

Please note: Inheritance tax planning, will writing, estate planning and trusts are not regulated by the Financial Conduct Authority (FCA)