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

The Chancellor shied away from slashing inheritance tax in today’s Autumn Statement, as it emerged the levy is set to raise nearly £10billion a year by the end of the decade.

After weeks of rumours Jeremy Hunt was planning to cut the 40 per cent rate or raise the thresholds, a revamp of the ‘death tax’ was shelved.

Today, the latest HMRC data for April to October showed payments from inheritance tax were £4.6billion, up £500million from the same period last year.

That was followed by figures from the Office for Budget Responsibility revealing the £7.1billion tax take in 2022/23 is forecast to hit £9.8billion by 2028/29 – a 38 per cent increase.

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

Meanwhile, receipts have soared because frozen thresholds and the property price boom are catching more bereaved people in the net.

> Ten ways to avoid inheritance tax (legally)

Government sources suggested cuts to inheritance tax were abandoned due to fears it would be dubbed a handout to the rich by Labour, but the idea would be considered again before the Spring Budget.

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

How could burden of inheritance tax be eased?

Calculations by financial services firm Quilter estimate:

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

– If it was cut from 40 per cent to 30 per cent instead, the saving to people inheriting larger estates would cost the Treasury £7.7billion.

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

Reducing the headline rate from 40 per cent would mean the same number of estates pay inheritance tax but their bills would be cut.

Raising the threshold would lift 12,500 families a year out of paying any inheritance tax

Reprieve on inherited pension pots

The Government has dropped plans for tighter tax rules for pensions inherited from loved ones who die aged under 75, starting from April 2024.

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

The Treasury consulted on whether to levy income tax on withdrawals from pension pots inherited from younger savers too.

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

For example, beneficiaries might opt for a lump sum to avoid tax rather than income from an inherited pension, or people might take pensions sooner to avoid their loved ones paying income tax on it.

The mooted changes came as the Government hammers out the longer term implications of its abolition of the lifetime allowance in the last Budget.

Hunt ditched the £1,073,100 total limit people can have in their pension pot without facing tax penalties with effect from April 6, but the underlying rules still need to be resolved.

Pension tax ‘horror’ thankfully avoided

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

‘Fortunately, the government has confirmed that such pensions will remain tax free from April 2024 – a continuation of their current treatment,’ says Jon Greer, head of retirement policy at Quilter.

‘This is good news. If the government had gone ahead with the change to the tax treatment there would have been an incentive to take remaining funds as lump sums which are tax free up to the available lump sum and death benefit allowance, which will stand at £1,073,100.

‘This confirmation means that there will be a similar treatment following the abolition of the lifetime allowance, albeit the amounts that can be used to provide beneficiaries’ pensions tax free appear to be unrestricted in their tax-free status. We look forward to seeing the fine detail in the Finance Bill.’

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

‘One such potential horror that has thankfully been avoided was around inherited pensions where the person dies before their 75th birthday.

‘Under current rules, these pensions could be passed on free of inheritance and income tax. This is a departure from the post age 75 scenario where income tax is payable.

‘However, it was suggested in documents earlier this year that government would look to change this and align the pre age 75 position along with that at post age 75.

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

‘If these changes had occurred, it would have brought confusion to people’s financial planning, so it is enormously good news to see this will not happen.’