With a new Labour government coming in, it might be useful to make some predictions about what changes we can expect with regards to Wills, Trusts, and Inheritance Tax.
While we cannot predict the future, there are two sources of information we can look at. The first is the Labour Manifesto, and the second is looking back at what Labour did in this area the last time they were in power between 1997 and 2010.
First, the manifesto mentions Inheritance Tax (IHT) only once, on page 21, promising to ‘end the use of offshore trusts to avoid inheritance tax’. It is not clear what this means exactly, as the use of offshore trusts to avoid inheritance tax has already been significantly reformed in recent years to make their use much less beneficial for all UK domiciled people. The benefits of offshore trusts for non-domiciled individuals have also been somewhat reduced, especially with regards to offshore trusts with interests in residential property, but they remain widely used, and we can perhaps expect an expansion of regulations intended to reduce or eliminate these trusts being classified as excluded property for Inheritance Tax (i.e. not subject to IHT). Such changes would affect very few people, largely non-domiciled individuals.
Looking back at the changes Labour brought in between 1997 and 2010, the track record is quite mixed. On the one hand, the tax-free allowance available to everyone (the ‘Nil Rate Band’) increased steadily from £215,000 in April 1997 to £325,000 in April 2009. The level remains frozen at £325,000 meaning it has not increased under the 14 years of Conservative government, which might be surprising to most people considering the political rhetoric.
Labour also introduced the concept of the Transferable Nil Rate Band in 2007, which made it much easier for married couples to combine their tax free allowances without having to make complex Wills which set up discretionary trusts. This change made sensible IHT planning by married couples much easier (and in many cases automatic), and as a result used and available by many more people.
Labour did make significant changes to the taxation of trusts in 2006, in most cases making them much less attractive as tax-avoidance structures. Essentially they made setting up new trusts much more expensive (in terms of tax), as well as increasing taxation on an ongoing periodic basis of most trusts. As a result, the use of trusts purely for tax mitigation has decreased, although they remain useful in some circumstances as well as having other benefits besides taxation.
To speculate on what we might expect form the new Labour government, I will set out a few broad predictions:
- 1. The Nil-Rate Band will likely remain frozen at £325,000 (as it has been since 2009). This is a ‘stealth’ way of increasing the IHT revenue without and explicit change in policy. By not changing the rate, more and more estates will be subject to IHT as asset prices rise.
- 2. New legislation is likely to bring more and more offshore trusts within the scope of UK IHT (as hinted at in the manifesto).
- 3. There could be reforms of the Residence Nil-Rate Band (RNRB) tax allowances. The RNRB was introduced in 2017 to give an additional tax-free allowance to estates which had (1) a residence, that was (2) passing to descendants and where (3) the estate as a whole was worth £2 million or less. I would not be surprised if the RNRB was reformed by being both made broader (perhaps being available to a wider range of beneficiaries to reflect the increase in alternative family structures) and perhaps less generous (for example not increasing the tax-free thresholds in line with inflation).
- 4. There cold also be reforms to various tax reliefs currently available for certain kinds of investments (Business Relief and Agricultural Relief) which are currently an easy means by which a very large amount of IHT is avoided (perfectly legally) but where the relief is arguably going beyond its policy justification. While the policy is intended to encourage investment in new trading businesses, the relief is currently largely used to as part of a mixed investment portfolio as a tax-mitigation strategy. It would not surprise me if the extent of the relief is narrowed significantly to clamp down on such broad use.
- 5. There could be reforms in how Wills are made, for example by allowing the use of electronic or video Wills. The current Wills Act dates to 1837, and there have been plans in the pipeline for many years to modernise the law of Wills. This would not likely affect IHT, but make it easier for more people to make valid Wills.
However, I mostly expect the Labour government to avoid making any headlines in this area of the law. Inheritance Tax is, rightly or wrongly, hated by the British public, arguably much more than is justified considering how little money it brings in every year as a proportion of total tax revenue. It would be political malpractice to make changes increasing Inheritance Tax considering the avalanche of negative headlines that would result. If Labour is keen to increase tax revenue, changes to IHT are one of the least politically palatable ways to do it.
For more information about IHT and Wills, please contact Alexander Mahdavi, Head of JPC’s Private Client team, by email amahdavi@jpclaw.co.uk, telephone 0207 625 4424 or connect with him on LinkedIn.
