“Abolishing the residence nil rate band and increasing the main nil rate band to £500,000 per person (£1mn per couple) would be a welcome simplification and cost very little,” he says.
“IHT is unpopular at the best of times, so I’d expect IHT increases will come with the smokescreen of simplification, and some changes that benefit small to mid-range estates.
“We might see the small number of estates paying IHT actually drop further, but significant tax increases for the few that are large enough to suffer significant IHT under the current rules.”
Potential changes to increase the IHT take from the wealthiest taxpayers, Falvey says, include removing the exemption for residuary pension funds on death, introducing progressive IHT bands, and/or tightening the qualification criteria for business relief, such as removing relief for Aim shares.
But Hollands says: “You could see a lot of investors say, ‘I don't need to hold these higher risk illiquid companies anymore’. But the government has been clear that it wants to encourage more investment into those sorts of businesses.
“So one possibility might be that they cap an individual's access to those types of reliefs. And that's something that some Labour-leaning think tanks have proposed. In other words only, say, £500,000 of business relief is available to an individual.”
For investors with an Aim portfolio for business relief purposes, Hollands highlights the risk of a knee-jerk reaction. “Disposing of them now, you might find that actually what is introduced is, for example, a lifetime cap that wouldn't have impacted you.
“You’d then be back to square one, because you'd potentially have to buy those shares again, and have to wait another two years [for relief].”
Pension tax relief
The estimated net cost of pension income tax and national insurance contributions relief is estimated to be £48.7bn in the 2022-23 tax year. The figure is up from £47.6bn in 2021-22, and one that Falvey says would be an attractive cost to cut for any chancellor, albeit a “politically difficult” area.
“Previous chancellors have either shied away from making changes, or had to soften the rules – see Jeremy Hunt abolishing the lifetime allowance to placate doctors and prevent mass retirements,” Falvey says.
“However, if the government’s finances are as bad as the chancellor has suggested, Reeves may choose to spend some of her political capital on tackling this issue early in this parliament.”
Potential options for the chancellor that Falvey outlines include:
- reintroducing the LTA on total pension saving in some format, although perhaps exempting public sector pensions;
- cutting the overall rate of tax relief on contributions to 30 per cent, or imposing an annual maximum relief in cash terms; or
- imposing an annual maximum to the national insurance contribution exemption from employer pension contributions.
Limiting income tax relief on contributions to a fixed rate seems simple, but would be difficult for HMRC to implement across the board, says Falvey. “The inevitable consequence is a yet more complicated tax system.
