A protection that allows people to pass on assets to their husband or wife without having to pay inheritance tax could be on the Budget chopping block, it is feared. Currently, people can transfer unlimited assets between them without paying inheritance tax under what is known as spousal exemption.
However, finance experts suggest it is highly likely the Treasury has looked at the exemption ahead of the Autumn Budget on October 30. Collectively, spouses used the exemption to transfer £15.5 billion worth of assets in 2021-22 whereas the next biggest relief – business property relief – shielded £3bn.
This makes it by far the most valuable tax break in estate planning. There are are fears this inheritance tax exemption could be capped or even removed as the Chancellor, Rachel Reeves, casts around for cash to fill a claimed £22 billion black hole in government coffers and head off cuts to public services.
An academic-led think tank has proposed capping the amount that can be transferred tax-free between spouses at £10m, which would only impact the very wealthy, in order to improve the fairness of the inheritance tax system. It argues the change is necessary because the ultra-wealthy can currently more easily use the spousal exemption to dodge inheritance tax on large assets such as businesses.
The Centre for the Analysis of Taxation (CenTax) wrote: “The main aim of the spouse exemption is arguably to ensure that the surviving spouse does not face any material change in their standard of living as a result of inheritance tax due on the first death.
“Surviving spouses have the opportunity to engage in further tax planning, for example via gifts to heirs or into trust, meaning that the spouse exemption can be used to circumvent inheritance tax altogether.
“Since accrued capital gains are also currently wiped out at death, spouse exemption can result in assets being passed to heirs completely tax-free.”
The exemption was introduced in 1972 to ensure widows and widowers were not faced with huge inheritance tax bills. The main inheritance tax rate is 40 percent, however many families – particularly the super-rich – pay a lower effective tax rate because they are able to take advantage of allowances and exemptions.
According to official figures, a family inheriting an estate worth £3m to £4m pays an average effective tax rate of 25 percent, while, typically, a family inheriting a £10m estate pays an even lower rate at 20 percent. CenTax found that the use of the spousal exemption plays a major role in reducing a family’s average effective tax rate, especially for the ultra-wealthy.
Its researchers estimate the cap would impact fewer than 0.1 percent of estates – less than 100 deaths a year – and raise up to £350m in revenue. Separately, the Institute for Fiscal Studies has suggested capping the spousal exemption.
It said: “A potential direction for reform could be to cap spouse exemption at a high threshold and increase the transferable nil-rate band for the survivor by the post-tax amount of assets on which their partner paid inheritance tax.”
Arun Advani, director of CenTax and associate professor at the University of Warwick, said: “We need to think about how these inheritance tax reliefs interact with each other. If the Government reduces business property relief but leaves agricultural relief, then people will just buy up farmland.”
Experts warn a spousal exemption cap could deter wealthy taxpayers from living in the UK. David Denton, tax expert at investment firm Quilter Cheviot, told the Telegraph: “Placing a cap on the inheritance tax spousal exemption would bring in a very minimal amount of revenue for the Exchequer, but would have the potential to further dissuade high net worth individuals from living in the UK which could have a detrimental impact on the economy.”
Sarah Coles, of stockbroker Hargreaves Lansdown, said: “Setting the cap at £10m might persuade people that it’s not something they need to worry about, but even then, changing a rule that has been around for more than 50 years might worry people that this could be the thin end of the wedge, and a precursor to a tighter cap.”
