Recently, we’ve seen increased discussions from various left-leaning think tanks pushing for new tax measures targeting individuals who have accumulated wealth. The Resolution Foundation, in particular, has been at the forefront of these discussions.
Torsten Bell - previously the head of the Resolution Foundation - is a Labour MP who enjoys significant backing from party leadership. This support makes his think tank’s proposals particularly noteworthy and deserving of serious consideration.
In particular Bell is advocating for a new exit tax to penalise those looking to move their wealth out of the UK.
Now the Resolution Foundation has proposed another potential tax change that would affect those who choose to remain in the country. This development is significant and may be closer to implementation than initially thought.
Inheritance tax receipts reached a record high of £7.5 billion last year. However, the Resolution Foundation has identified a way to potentially add an extra £2 billion to this total. This proposed change is highly plausible and could have considerable implications.
How Could Inheritance Tax Change?
The Foundation is suggesting the removal of the £175,000 main residence nil-rate inheritance tax (IHT) band. Introduced in April 2017 by then-Conservative Chancellor George Osborne, this band allows individuals to pass on their family home to direct descendants—such as children and grandchildren—without incurring IHT, in addition to the £325,000 basic nil-rate IHT band.
Together, these allowances enable each adult to transfer up to £500,000 worth of assets to their heirs free of IHT. Married couples and civil partners can pass on up to £1 million tax-free. Given that this policy was a hallmark of Conservative tax policy, it has always been vulnerable to potential changes under a Labour government.
The Resolution Foundation has criticised the residence nil-rate band as "a complex and distortionary relief," suggesting it could be scrapped.
For financial advisors and their clients, this proposed change could have a substantial impact on estate planning strategies. Chancellor Rachel Reeves is considering various tax adjustments, including potentially reducing tax relief on pension contributions. However, these measures could be complex or have unintended consequences. We wrote about this last week.
In contrast, removing the residence nil-rate band could be implemented quickly. Reeves could enforce this change immediately, which would reduce IHT bands by £350,000 per family for the 2025/26 tax year onwards.
Reeves has previously dismissed the residence nil-rate band as a "tax break for a wealthy elite," and this change could be part of a broader strategy to balance public sentiment and political pressures.
For clients, this proposed change highlights the importance of proactive estate planning. If implemented, it could lead to increased IHT liabilities, with potential additional tax bills of £70,000 for individuals losing the £175,000 band, or up to £140,000 for couples losing the combined £350,000 band.
What To Do About Inheritance Tax Changes
As financial advisors, it is crucial to stay informed about these developments and consider their implications for clients' estate planning strategies. The proposed changes could impact the transfer of wealth to heirs and necessitate adjustments to current plans to minimise tax liabilities effectively.
If you and your family are facing Inheritance Tax challenges: Get In Touch with us today. Our expert team of Independent Financial Adviser can help you and your family navigate the challenges of Inheritance Tax - especially as the rules change!
[Source: The Daily Express]
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