Rishi Sunak’s Inheritance Crossroads – Autumn Statement 2023

The Chancellor of the Exchequer, Jeremy Hunt, has announced that he will be unveiling the Autumn Statement 2023 to Parliament on 22 November. This could be an opportunity to start to showcase new policies ahead of the upcoming election, but Mr Hunt has already hinted any tax cuts in the Statement are unlikely as these could counteract the Bank of England’s efforts to reduce inflation. 

However, with the prospect of a UK General Election in the next year or so, the inevitable political scramble to come up with bold and innovative policies aimed at gaining popularity from the British Public has started and in the aftermath of The Conservative Party’s recent by-election defeats, Prime Minister Rishi Sunak is rumoured to be considering the abolition of Inheritance Tax (IHT). 

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What can we expect?

According to many outlets, including the Financial Times*, one possible policy change which could be included in the 2023 Autumn Statement is increasing the Individual Savings Account (ISA) allowance for investing in UK companies. The rationale would be to encourage investment into UK companies, which had an 18% valuation gap in April 2023 when compared to US companies. This means investors are willing to pay 18% more for a US company rather than a UK company on a like-for-like basis. We believe there are two main reasons for this:

Investors have lost confidence in the UK economy and this has led to valuations decreasing.

The US economy is heavily focused on technology firms, which tend to command higher valuations in anticipation of future growth. 

If this change were to be announced, investors would want to take advantage of the additional tax advantageous allowance, but given the exposure to UK companies already held in diversified portfolios, care would need to be taken to ensure that this did not result in an overweighted allocation to UK equities.  
 
An ISA is a tax-efficient investment wrapper allowing UK individuals to invest up to £20,000 a year without paying income or capital gains tax. There are various types of ISAs in the UK including Stocks and Shares ISAs, Lifetime ISAs, Innovative Finance ISAs and Cash ISAs. Another potential additional change that has emerged is the creation of a ‘Mega-ISA’, bringing together Stocks and Shares ISAs and Cash ISAs. However, there are different views on whether this would result in the intended simplification.

Another Autumn Budget rumour is that the state pension triple lock guarantee is at risk. By way of reminder this is the guarantee that the state pension will increase by the higher of: 

• 2.5%
• Inflation
• Wage Growth 

Given wage growth was 8.5% for the relevant period (May to July 2023), this would mean another large increase to the state pension after last year’s 10.1% increase.  This would be very expensive for the government with finances already stretched, but any tampering with the state pension could be unpopular with the voting public.  A tweak in the wage growth calculations to exclude one-off payments to public sector workers could be another route to lessen the burden on public finances by reducing the increase without actually scrapping the triple lock and this may be an option Mr Hunt is considering.
 
Another potential change which has made the news in recent weeks is the potential abolition of inheritance tax (IHT).

IHT is a tax levied on the estate of a deceased person at 40% on any value above their available nil rate band (NRB). The nil rate band is currently £325,000 and there is an additional Residential Nil-Rate Band (RNRB) of £175,000 per person that applies when passing on a main residence to direct descendants, potentially increasing the tax-free threshold. As NRBs and RNRBs can be passed between spouses/ civil partners, this means a couple can potentially pass a total of £1,000,000 to the next generation IHT free, though there are complexities depending on previous gifts made and the potential tapering of the RNRB depending upon the total value of the estate.  Please speak to your TPO adviser for more details regarding this.

The abolition of IHT would have benefited 3.7% of all UK estates in the 2020-21 tax year according to the latest figures from HMRC. IHT is estimated to generate £7.2 billion of tax revenues for the government in 2023 according to the Office for Budget Responsibility and the Independent Fiscal Watchdog. That said, IHT is a particularly unpopular tax, so this change could be a vote winner. If there were to be changes, it is unclear whether the Chancellor would elect to decrease the tax levy of 40% or increase the tax threshold of £1 million (including RNRB).
 
Given Mr Hunt’s reluctance to reduce taxes at present, it seems more logical for the government to wait until the Spring Budget in 2024 before making any changes to IHT. However, given the latest poll by Opinium (Headline voting intention, 25-27 October 2023) puts the Tory party at 27% (15% behind Labour), Mr Hunt will be feeling the heat from his fellow MPs to present an Autumn Statement to swing the polls back in the Tories’ favour. However, amidst a cost-of-living crisis, geopolitical uncertainty and stagnant economic growth, policy changes which would only benefit fewer than 4% of estates could prove controversial. 

Conclusion

Even without making any further changes to tax rates, public finances continue to benefit from the ‘stealth tax’ of freezing tax bands back in 2021 until 2026 (later extended to 2028).  As wages rise and tax bands stay frozen, the BBC estimates by 2028 there will be an additional 3.2 million new taxpayers and 2.6 million more people will pay higher rate tax.  Despite this, there appears to be limited scope for vote winning giveaways, so we are expecting announcements to be limited to tweaks around ISA funding limits (to potentially provide a boost to UK companies) and a potential tweak to state pension calculations to limit next year’s increase.

More headline grabbing changes could then follow in the Spring Budget 2024 as the next election draws closer.

*Source: Financial Times

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions

The Financial Conduct Authority (FCA) does not regulate estate planning or tax advice.