Inheritance tax: The Labour Government’s Autumn Budget of 2024

Inheritance tax is a tax that is charged on someone’s assets on their death. The amount of tax payable depends on any assets held jointly; held on trust; and whether the deceased made substantial gifts within seven years of their death.

With George Osborne as Chancellor, the then Conservative government increased the amount of one’s estate that can pass free of inheritance tax to £1million. However, many criteria must be met before reaching that figure. The figure comprises a nil-rate band (NRB) of £325,000 and a residence nil-rate band (RNRB) of £175,000. These allowances can be transferred to a spouse or civil partner, meaning the £1million figure is not available to the estate of single or divorced people.

The NRB is reduced by substantial gifts made in the seven years before death and the RNRB tapers by £1 for every £2 over that the estate exceeds £2million in value. Therefore, careful planning is often needed to take full advantage of these reliefs.

The value of the estate that exceeds the reliefs available is taxed at a rate of 40%. This tax liability must be paid before the beneficiaries named in the Will receive their inheritance.

How can I reduce the inheritance tax payable on my death?

The most common way of mitigating the tax liability on one’s death is to reduce the value of their estate. Typically, this is done by giving away assets, which in effect amounts to accelerating a beneficiary’s inheritance tax, though spending the money on oneself is an equally viable approach. With either approach, the most important consideration is to ensure that one retains sufficient wealth to continue to live as they would like and to take account of possible future care costs.

Someone making a gift must live a further seven years for the gift to fall beyond the scope of inheritance tax. There is no limit to the amount that can be given in this way. However, thought should be given as to the prudence of handing large sums of money to individuals who may not be accustomed to wealth.

An alternative approach would be to transfer assets to a trust. This would allow the person making the gift to retain some control over the funds. For example, the funds could be used to pay for a grandchildren’s education. The maximum amount that can be passed to a trust without giving rise to an immediate charge to inheritance tax is £325,000. 

If the person making the gift dies within seven years, the value of the gift would reduce their NRB of £325,000, meaning that the estate would ultimately pay the same amount of tax as had the gift not been made. If the amount given away within seven years of death exceeds £325,000, the rate of tax depends on the date of the gift. It would also be for the recipient of the gift to pay the tax. Therefore, careful consideration should be given both when the gift is made and by the executors in calculating the tax payable by the estate.

Common mistakes when trying to reduce inheritance tax

Avidity to avoid a large inheritance tax bill has led some to attempt to reduce their chargeable estate, albeit unsuccessfully or with unintended consequences. 

Such mistakes include reserving a benefit in a gift, i.e. where one purports to give away an asset but continues to enjoy it, even if to a small degree. The most common example of this is to transfer the legal title of the family home to one’s children, only to continue to live there. In these circumstances, HMRC will conclude that the transferor has not made a successful gift and the value of the home remains chargeable to tax. This can be avoided by paying a commercial rent to the new owners. However, thought should be given as to whether one would wish to cede control of their home, irrespective of the tax advantages. 

Making a gift to one child and not to another can also prove counterproductive. While this is frequently done with the best of intentions, if one’s Will does not include a clause that equalises the amount each child ultimately receives from their parents, resentment which was not previously present can emerge. 

Possible changes in the budget

One’s domicile status determines whether their worldwide assets are charged to inheritance tax at their death, or only those assets located in the UK. Although recent reports have cast doubt on the new Labour government’s plans to reform the rules surrounding domicile, it remains likely that change to some degree is likely. For example, the length of time one will be required to reside outside of the UK before losing their UK domiciled status could be lengthened. 

Those with a UK domicile at birth can only lose this status if they leave the UK with no intention to return. Moreover, the executors must be able to show this when submitting the estate tax return. A move away from this subjective reasoning to an absolute, objective test would be welcome.

There is speculation that certain reliefs might be altered, reduced or removed. Currently, business property relief (BPR) allows reduced rates of inheritance tax on business assets such as shares in a business or partnership. Up to 100% relief is available on applicable assets where they have been owned for at least two years and the business is considered to be actively trading. The Chancellor could extend the period of time a business must have been trading in order to qualify for the relief, or introduce lower rates of relief for different lengths of ownership. 

The seven-year gift rule might be extended, for example to 10 years, bringing more gifts within the tax net. This would make lifetime giving less attractive and introduce additional uncertainty as executors may struggle to identify gifts made up to a decade prior to death.

How Moore Barlow can help

Our Private wealth solicitors offer a bespoke service tailored to your individual needs, ensuring that your wealth is protected and managed effectively. With extensive experience in advising high net worth individuals, we provide expert guidance on estate planning, tax mitigation, inheritance tax and wealth structuring. Choose us for peace of mind and a comprehensive approach to managing your private wealth.


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