Beware fiscal drag: the more things stay the same, the more they change
As human beings, we’re hard-wired to fear change. It’s part of why we get so frustrated with a new train timetable, why we hate phone software updates, and why there are several hundred online forums dedicated to how long it will take to get used to a new haircut.
It is, however, exactly this attachment to stability which allows lawmakers to adopt maintaining the status quo as a position of faux neutrality when it comes to fiscal policy. In reality, leaving tax bands unchanged while inflation and wage growth increase at unprecedented rates has been one of the most effective methods of increasing tax receipts in recent years. This concept is known as ‘fiscal drag’.
The Times recently launched a campaign against this so-called ‘stealth tax’, targeting income tax specifically. However, the issues outlined are replicated across all forms of personal tax, and none more so than Inheritance Tax (IHT) where the £325,000 nil-rate band (unchanged since 2009 ) is frozen until at least 2028.
Highlighting the significance of that decision, HMRC has indicated that they expect an additional 49,400 estates to pay the levy, bringing the total to 283,400.
While there is an additional allowance of £175,000 available to those who leave residential property to direct descendants, this is tapered where an individual’s estate exceeds £2 million (a threshold which has been frozen since its inception). Despite speculation suggesting that IHT reform was on the table for the Chancellor’s Autumn Statement, none was forthcoming.
With only 5 per cent of voters able to correctly identify the IHT threshold, the net result is an increased number of estates paying IHT unexpectedly or paying more IHT than expected.
Meanwhile, far from the traditional view of IHT as the great redistributor of intergenerational wealth, it may well hit those who are also experiencing increased rates of income tax as a result of the same fiscal policy.
The best strategy for addressing the impact of fiscal drag is early planning, to take full advantage of the many legitimate strategies for mitigating an IHT liability. In short – get savvy, or risk sleepwalking into an unnecessary tax bill.
Justine McCluskey is Senior Solicitor in Private Wealth and Tax at Shepherd and Wedderburn.
Partner content in association with Shepherd and Wedderburn.