As UK Chancellor of the Exchequer Jeremy Hunt is poised to present his Autumn Statement to parliament later this month, wealth managers share their insights on what to expect and what’s on their wish list.
With the UK economy on the brink of recession, and with a general election due at some point in 2024, pressure to cut or even remove the controversial inheritance tax appears to be growing. It is one of the areas that wealth managers think could be included in a package from finance minister (aka Chancellor of the Exchequer) Jeremy Hunt on 22 November.
We examine a number of views from wealth managers on what Hunt might do.
Although several tax allowances and thresholds have been fixed for the next few years, UK wealth manager atomos thinks Hunt may make some changes.
Inheritance tax changes
“The Chancellor may also be considering cutting one of the nation’s most hated taxes, inheritance tax,” the firm said. The overall IHT tax-free limit will remain at £1 million ($1.24 million) until 2028 under current rules, but Hunt may reduce the tax rate or even abolish it altogether.
This would be a blow to the public purse. IHT receipts reached £3.9 billion between April and September, according to the latest HMRC figures, putting them on track for a record-breaking year.
“We would applaud a reduction in the 40 per cent rate of inheritance tax or a simplification by abolishing the £175,000 residence nil rate band and increasing the nil rate band to £500,000 per person. This would allow married couples or civil partners to more easily pass on an estate worth up to £1 million IHT-free,” atomos said.
Alternatively, Hunt could reduce IHT from 40 per cent to 36 per cent for everyone – currently one can qualify to pay IHT at 36 per cent if 10 per cent of a net estate is donated to charity.
“We want everyone to be able to pass on their wealth to younger generations more effectively. Estate planning is an important way to mitigate the impact of IHT, but the complexity of the current IHT system unfairly penalises those who don’t have professional financial planning in place,” the firm added.
Nevertheless, new analysis from UK wealth manager Quilter has found that if the government were to raise the inheritance tax threshold to £500,000 and remove the residence nil rate band (RNRB), it would cost the Treasury £6 billion from 2024/25 to 2027/28.
Quilter’s calculations show that this reform would cost the Treasury on average £1.4 billion per year and prevent around 12,500 families paying inheritance tax each year. Further calculations show that if the Treasury chose instead to reduce the rate of inheritance tax from 40 per cent to 30 per cent, it would cost the government £7.7 billion from 2024/25 to 2027/28. The same number of estates would pay IHT, but their bills would be reduced, Quilter said.
Similarly, if the rate of inheritance tax was dropped to 20 per cent, Quilter estimates that it would cost the government £15.4 billion from 2024/25 to 2027/28. There are rumours that £15 billion of fiscal headroom might be used to help pay for a reduction in the headline rate of inheritance tax.
The NRB ["nil-rate band"] has been set at £325,000 since 2009, with the RNRB in place since 2017. At present any estate valued lower than £325,000 has no inheritance tax due. However, the RNRB offers an extra allowance of up to £175,000 if a home is passed to children or grandchildren. This means that together a married couple or one in a civil partnership has an inheritance tax allowance of £1 million.
“Reducing the headline rate of tax would help reduce bills which would no doubt be popular, but it could be costly for the government and people will still get landed with an IHT bill,” Shaun Moore, tax and financial planning expert at Quilter, said. “If any changes are announced any benefit could be short-lived as if Labour does form the next government it has already stated that it would reduce some of the IHT reliefs available such as Business Property Relief and Agricultural Property Relief.”
On the wider economy, atomos thinks Hunt’s room for manoeuvre is limited. Britain’s longer-term issue remains lacklustre investment. This is one reason why atomos said it prefers to invest in a globally diversified way, without a bias on the home market.
“It feels unlikely that we will get meaningful announcements on this so close to an election, but it is possible. Overall, we expect to see more ‘giveaways’ in the Spring Budget because it is closer to election time,” atomos said.
Meanwhile, Alastair Black, head of savings policy at abrdn, believes that the most important quality that is needed on long-term savings and investing policy is stability. “If the UK government wants to encourage long-term savings and investment in the UK, they need to give confidence to investors that pension and ISA policies aren’t highly volatile and will not be used as political footballs. This will underpin the delivery of good advice and give people the confidence they need to make and maintain long-term plans,” he concluded.
An overhaul of Individual Savings Accounts (ISAs) - a mass-market structure - is rumoured, which would aim to simplify what has become an increasingly complex regime.
ISA sales figures show that a large proportion of savers’ money still goes into Cash ISAs even though investing gives the potential for better returns over the long run. Combining the cash and stocks and shares ISA into a single product could encourage higher levels of investing, atomos said in a note.
The ISA allowance of £20,000 has not changed for some years now, and the Chancellor could decide to increase it or split the lifetime ISA limit of £4,000 a year out from the total, so that those eligible can save up to £24,000 tax free each year.
“We would like to see ISAs made less complex. They are a useful financial planning tool but haven’t been subject to a broad-brush overhaul since they were introduced. The Chancellor might consider creating a single ISA which can be used for cash savings or investing,” the wealth manager continued.
Pension triple lock
The triple lock is a pledge that the state pension will increase each April in line with either CPI inflation, wage inflation, or 2.5 per cent, whichever is greater. It is due to rise 8.5 per cent from April next year, reflecting above-average earnings' growth.
“Our financial planners think that, although the triple lock is controversial because it is generous, the government can’t abolish it so close to an election. The Chancellor might decide to raise it in line with regular wages, excluding bonuses, which would mean a more moderate increase to 7.8 per cent,” atomos said.