For Nigel Farage it would be an open goal. If reports are right that Chancellor Rachel Reeves will target inheritance tax (IHT) in her autumn Budget, she will hit swathes of people who do not think of themselves as rich but are caught in the IHT net because they own their homes and have a personal pension plan.
The number of people who are likely to be affected will be huge – potentially big enough to swing a tight election.
We don’t, of course, know the detail of what the Chancellor will do. Stories include the idea of limiting the amount people can give away without incurring a tax liability. At the moment, any gift made seven years before death is free of IHT. There could, for example, be a lifetime limit where gifts beyond a certain amount, say £1m, would be counted as part of someone’s estate even if it had been made 50 years before they died. That would square with the cuts in business property and farm relief brought in by Rachel Reeves in her first Budget.
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.
Either way, what we do know is that this year more families are giving away money earlier for fears of punitive tax increases, and that inflation will pull more and more estates into the IHT bracket through the lifetime of this parliament.
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
The sums are simple. That 31,500 will rise simply as a result of rising house prices and growing pension pots, so let’s assume it goes back to the previous peak and a bit beyond, to 35,000. That is every year, so over the next four years it would be 140,000 estates.
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.
Voters are not stupid. IHT is already an extremely unpopular tax. A YouGov survey showed that 61 per cent of people think it is unfair, mostly because they see it as double taxation. People pay taxes all their lives; why should they pay again when they die? Now the self-interest of hundreds of thousands of people will be added to that moral argument of IHT being unfair.
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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The irony is that while the comfortably off are likely to be hit by an increase in IHT, the really wealthy can largely avoid it. Many of them are not permanent UK residents anyway, and those who are have the option of retiring abroad.
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 far as the total exodus of wealthy people is concerned, according to Henley & Partners, 9,500 millionaires left the UK last year, and a predicted 16,500 will leave this year.
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
One of the great problems of economics is that you never know for sure what the response to an economic shock will be until the event happens. This applies to everything from, right now, US tariffs, the possible ceasefire in Ukraine, a radical change in monetary policy at the US Federal Reserve… or inheritance tax here in the UK.
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.
What seems to be happening is a bit of both. Prices are running up on Bank of England forecasts, as reflected in the very narrow decision last week to cut interest rates. And the latest labour market figures suggest that companies are indeed shedding jobs, but maybe not as swiftly as some of the more gloomy commentators had expected.
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.
I was, however, rather shocked by the number of “non-doms” who have left since 2007, as noted above, and by the fact that the tax revenue is no higher now than then. That’s in cash terms, so allowing for inflation, the money coming in has fallen sharply. Not good.
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.
I know some friends who have just done that. For someone mid-career, it’s perhaps different. A spell abroad in a low-tax environment may make sense for professional reasons, quite aside from the money saved. And there are certain professions – racing driving, for example – where the logistics of living in Monaco or Switzerland add to the financial attractions.
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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