Chancellor refuses to cut inheritance tax – and take is forecast to soar to £10bn

The Chancellor shunned a cut in inheritance tax in today’s autumn statement, as it emerged the levy will raise almost £10 billion a year by the end of the decade.

After weeks of rumors that Jeremy Hunt planned to cut the 40 percent rate or raise the thresholds, a review of the ‘death tax’ was shelved.

Today, the latest HMRC data for April to October shows that inheritance tax payments amounted to £4.6 billion, an increase of £500 million on the same period last year.

That was followed by figures from the Office for Budget Responsibility showing that tax revenues of £7.1 billion in 2022/23 are expected to reach £9.8 billion in 2028/29 – an increase of 38 per cent.

Around 4 per cent of families pay inheritance tax – 27,000 in the 2020/21 tax year – but it is unpopular with the public who see it as a tax on death, property and the natural desire to pass wealth down through the generations.

In the meantime, incomes have risen enormously, as frozen thresholds and the boom in real estate prices lure more and more surviving relatives into the net.

> Ten ways to avoid inheritance tax (legally).

Government sources suggested the inheritance tax cuts were being scrapped amid fears Labor would call this a handout to the rich, but the idea would be reconsidered before the Spring Budget.

The Conservative party could also pledge in its manifesto to abolish inheritance tax altogether, in a bid to win votes at the next election.

How can the burden of inheritance taxes be eased?

Calculations by financial services provider Quilter estimate:

– Families wealthy enough to pay inheritance tax could save a total of £15.4 billion over the next three years if the rate is cut to 20 per cent.

– If it were instead reduced from 40 per cent to 30 per cent, the savings for people inheriting larger estates would cost the Treasury £7.7 billion.

– Raising the threshold from £325,000 to £500,000 for everyone, rather than limiting this generous extra benefit to homeowners with children, would save families £6 billion between 2024/25 and 2027/28.

A 40 percent reduction in the nominal rate would mean the same number of estates paying inheritance tax, but their bills would be reduced.

Raising the threshold would free 12,500 families per year from paying inheritance taxes

Deferment for inherited pension pots

The government has scrapped plans for tougher tax rules on pensions inherited from loved ones under 75 from April 2024.

Beneficiaries either pay no tax on inherited pensions up to the decedent’s lifetime benefit limit if the owner dies before age 75, or their normal income tax rate if they are 75 or older.

The Treasury has consulted on whether income tax should also be charged on withdrawals from pension pots inherited from younger savers.

However, tax could still have been avoided if beneficiaries had taken cash as a lump sum, outside of a pension. Financial experts warned that this would create skewed incentives that could lead to bad decisions.

For example, beneficiaries can opt for a lump sum to avoid tax instead of income from an inherited pension, or people can withdraw pensions early to avoid having to pay income tax on their loved ones.

The announced changes came as the government worked out the longer-term implications of the abolition of the lifetime allowance in the previous budget.

Hunt removed the overall limit of £1,073,100 that people can have in their pension pot without tax penalties from April 6, but the underlying rules still need to be sorted out.

Pension tax ‘horror’ fortunately avoided

Pension experts welcomed the news that the rules for people inheriting pensions from people who die before the age of 75 will remain unchanged.

“Thankfully, the government has confirmed that such pensions will remain tax-free from April 2024 – a continuation of their current treatment,” said Jon Greer, head of pensions policy at Quilter.

‘This is good news. Had the Government gone ahead with the change in tax treatment, there would have been an incentive to treat the remaining monies as lump sums that are tax free, up to the available lump sum and death benefit, which will be £1,073,100 amounts.

‘This confirmation means that similar treatment will apply following the abolition of the lifetime allowance, even though the amounts that can be used to provide beneficiaries’ pensions tax-free appear to be unlimited in their tax-free status. We look forward to seeing the fine details in the Finance Bill.”

Helen Morrissey, head of pensions analysis at Hargreaves Lansdown, said: ‘The abolition of the lifetime allowance is fraught with complexity and the potential for hidden horrors is high.

‘One of those potential atrocities that was fortunately avoided concerned inheritance pensions where someone dies before their 75th birthday.

‘Under current rules, these pensions could be passed on free of inheritance and income tax. This differs from the scenario after the age of 75, where income tax is due.

‘However, this year, documents suggested that the Government would seek to change this and align the pre-age 75 position with the post-age 75 position.

‘This led to concerns that those who inherit a pension might be tempted to take the pension as a lump sum rather than as an income, or that people might be tempted to take their pension early to to prevent their loved ones from having to pay income tax on it.

‘If these changes had taken place it would have caused confusion in people’s financial planning, so it is extremely good news to see that this will not happen.’