Chancellor rejects calls for cuts to inheritance tax in autumn statement

Chancellor Jeremy Hunt has rejected calls to reduce inheritance tax in his autumn statement. Instead, he has decided to leave rates and allowances at the same level as they have been for the last three years.

Inheritance tax is set at 40% and becomes payable once the tax-free threshold of £325,000 has been passed. There is no tax liability if a person’s estate passes directly to their spouse. This exemption does not apply to their children.

The basic threshold can be boosted by the residence nil rate band, sometimes referred to as the family home allowance, which was introduced in 2017.

The government at the time recognised that more and more families were being caught by inheritance tax and introduced an additional main residence allowance, which rose to £175,000 in 2020.  It only applies to a person’s home, not the rest of their estate.

When added to the £325,000 nil-rate band for inheritance tax, this provides a combined tax-free band of £500,000. Married couples can combine their allowances. When one partner dies, their share of the estate is passed on to their spouse free of any inheritance tax.

This means that a married couple could have a combined allowance of £1m.   

There are also other steps people can take to reduce the burden.

One helpful way to pass money on without inheritance tax implications is to adopt the ‘little and often’ approach. This allows you to give away £3,000 per year tax free. It’s a useful way to give money to your children without them running the risk of having to pay tax on it when you die.

There is also the ‘seven-year gift rule’ which allows a person to give money or assets of unlimited value. The recipient will not pay inheritance tax if the donor lives for at least seven years. If the donor dies within seven years of making a gift, then the recipient could be liable to pay the 40% inheritance tax, depending on the value of the estate.

These are just some of the ways you could reduce inheritance tax liability. A little planning now could save your families thousands of pounds in the future.

Please contact us if you would like more information about the issues raised in this article or any aspect of inheritance tax planning.