The number of people who are likely to be affected will be huge – potentially big enough to swing a tight election.
Or maybe it would work the other way round. Someone could only receive a certain amount in gifts over their lifetime before having to pay tax on everything they got over that amount.
So how many people are affected? That is what will matter in political terms come the next election. The official position is that the number of estates caught by IHT is small. It was 31,500 in the 2022-23 tax year, or only 4.6 per cent of deaths. Actually, that is lower than in 2006-07, when it was 34,000, or 6 per cent. That does not sound like a lot – until you look more closely at how many people are actually affected.
Into the millions
Now, the UK is unusual as the tax is paid not directly by the estate but by the beneficiaries. Executors can only get control of the assets once IHT is paid. How many beneficiaries? Well, assume a typical family of two children, who have two children apiece – one of the things grandparents very much want to do is to help them with university fees – so that is six. So it’s not 31,500 people who will have their inheritance cut by IHT. On that calculation, it’s 840,000. Add in the families expecting to inherit from their parents and grandparents during the next decade, and the numbers go way into the millions.
It is glaringly obvious how a clever populist politician will frame the case against increasing IHT – and it is pretty clear who that politician will be. Nigel Farage has promised to abolish IHT if Reform UK wins the next election.
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There has already been an exodus of “non-doms” – people who live here but for tax purposes are domiciled abroad – since 2008, and even before the latest changes, the income tax and national insurance revenue was no higher last year than it was then.
As for those who choose to stay, well, so far there have been ways to mitigate the blow, the most popular being giving away spare cash early. For the very wealthy, that is hugely popular, particularly since there are complex ways of using trusts to defer capital gains tax and keep control of the assets. But if that option were closed by the Chancellor, then ending IHT becomes an even more obvious election winner.
Need to know
So we have to rely on anecdotal evidence, and the problem with that is it is almost skewed by interest groups who pick the stories that fit their world-view. We are getting this at the moment over the response to Labour’s tax changes. We didn’t know what companies would do in response to the increase in employers’ NICs, and there were all sorts of stories about companies cutting their labour force and/or putting up prices.
With IHT we simply don’t know how everyone will respond, which is why I take the predictions of a radical exodus of wealthy people with a bit of caution. Advisers say they are getting huge numbers of people asking their advice and they probably are, but we won’t know how many are gone until they are indeed gone. It suits advisers, of course, to say that they are much in demand.
Moving abroad?
As for us “doms”, what will we do? As someone in the middle of it all, my response is that moving offshore is a big deal for anyone well past normal retirement age unless there are strong personal reasons for doing so: children and grandchildren in New Zealand, for example, a country that happens to have no inheritance tax.
There is a further complication. Should you take a huge step simply for tax reasons when this Government may well be out of office in four years? That is a real question people I know are asking themselves. If overall tax revenues fall as a result of changes in IHT, these will almost certainly be reversed by the next lot, be it Reform or whoever. After all, governments do need revenue. Maybe better to plan as best as possible, but sit this one out.
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