Inheritance tax (IHT) is one of the most hated taxes of all. In a way that’s strange, given that until recently, only 4% or 5% of families were likely to pay it.
I think it’s the principal people don’t like. They’ve been taxed on their income and wealth all their life, only for HMRC to slap another tax on what’s left when they die.
Especially since that tax is imposed at a punitive rate of 40%.
IHT is likely to become more unpopular still, thanks to chancellor Rachel Reeves. She slapped IHT on farmers and businesses, apparently oblivious of the damage it will do.
Many farmers will no longer be able to pass on there farms to the younger generation, forcing them to sell to greedy landowners who would rather plaster them with solar panels than grow food.
Many privately run businesses will face inheritance tax bills running into tens of millions of pounds, which means their children won’t be able to inherit it. Many will get snapped by private equity companies and basically disappear.
Families also hate the fact that Reeves has slapped IHT on unused defined contribution pension pops on death. Incredibly, many families will have to pay both IHT and income tax, facing a combined tax rate of up to 67%.
The number of states paying taxes expected to increase to 10%, and those who are it will pay life changing sums. Don’t despair, though. It looks like there may be a way round this. I call it the new IHT five-year rule.
There are plenty of long-standing ways to limit your family exposure to inheritance tax. The best known is the seven-year rule.
This means that any gifts handed to loved ones become completely free of IHT provided you live for seven years after making them.
In the interim, they are treated as potentially exempt transfers, or PETS. So if you die within that seven-year period, the money may still incur IHT.
Although the tax charge does gradually fall on a sliding scale. If you die within three years you still pay IHT at 40%, but this subsequently falls 32%, then 24%, then 16% and finally 8% in year six.
After that, it’s all free of IHT.
Families also have annual gifting allowances, although these have been frozen for so long they won’t make a dent in a decent inheritance.
Plus there’s a little-known rule that allows families to make unlimited gifts out of surplus income. Unfortunately, they can’t make them out of capital. Sorry it’s only works for those with large, regular incomes.
Finally, there’s my new five-year rule. It may sound a bit trivial but it’s open to all, depending on events.
Jeremy Clarkson has already hinted at this, tweeting to his 8.1million followers, including disgruntled farmers who have been shafted by Labour’s IHT raid.
“Please don’t despair. Just look after yourselves for five short years and this shower will be gone.”
Keir Starmer’s Labour Party won the general election by a so-called “loveless landslide” in July. People voted for them, but only to get rid of the Tories.
Now they’re suffering a huge case of buyer’s regret, as Starmer and Reeves tax us all to death (and beyond) and tank the economy at the same time.
Incredibly, a petition demanding a fresh election will be debated in Parliament on January 6, after attracting a staggering 2.8 million signatures.
That’s not going to get rid of Labour, you will no doubt battle on through their full five-year term. On current form, it’ll be curtains for Labour at the next election in 2029.
The idea that we can make the economy grow by taxing it silly will have been tested to destruction. Whoever wins the next election, will have to reverse Labour’s tax raid, particularly on inheritances.
So all farmers, business owners and families need to do is survive five years. Then much of the IHT grade will be reversed and their family fortunes saved. Provided their hearts can stand five years of the current mob.
