The UK’s General Election is fast approaching and there has been a lot of attention focusing on inheritance tax (IHT). This includes speculation on whether a new Government will reform IHT (a mammoth task!) or opt to reduce the reliefs available.
A new Government is likely to mean a shift in tax policy, potentially targeting assets, but the full implications are, as yet, unclear. With this in mind, we explore what a new Government may mean for IHT.
The current regime
IHT in the UK is levied on individual estates worth over £325,000, with a standard rate of 40% on the value of their estate exceeding this threshold. This can be extended up to £500,000 where a home is left to an individual’s direct decedents due to the addition of the Residence Nil Rate Band (RNRB) (as it provides additional relief of up to £175,000). However, the RNRB is reduced, in some cases to £nil where the estate exceeds £2m.
With careful planning, individuals can also make gifts that fall outside of IHT. As long as the donor survives seven years from the date of gift and does not “benefit” from the asset gifted, the value of the gift will normally fall outside of an individual’s estate.
Where an IHT charge is in point, various exemptions and reliefs can reduce the taxable amount so that most estates do not pay IHT, despite it being the most emotive tax (including political and charitable donations, agricultural relief and/or business relief for example).
The more prominent of these reliefs, Business Relief is generally available if an individual owns ‘relevant business property’ for a period of at least 2 years. This can include:
- Sole trade / partnership.
- Unquoted shares/securities in a trading business (including those on the AIM market).
- Land or buildings used in a business.
Agricultural property relief is generally available on agricultural value including:
- Agricultural land or pasture.
- Woodland and buildings used in farming and such cottages, farm buildings and farmhouses, together with the land occupied with them, as are of character appropriate to the property.
Whilst IHT is paid on only a small percentage of estates, the level of IHT levied is increasing. This is mainly from the growth in house prices relative to the Nil Rate Bands, which have remained at their current level for many years.
Will there be a Budget straight away?
As election day draws closer and the polls indicate a new Government, it may be the time to consider how best to achieve your aims where you are looking to pass wealth on to your family and mitigate your IHT exposure.
The Labour party have ruled out having an ‘emergency Budget’ if they win the election. Instead, they have indicated they will wait until they have forecasts from the Office of Budget Responsibility. This is likely to take around 10 weeks, which suggests any Budget would be in the early Autumn.
If this timescale is correct, this may allow some time to carefully consider taking action ahead of the new Chancellor of the Exchequer’s Budget. Historically, changes to taxes are not “backdated” and will normally be set from the start of the next tax year or very occasionally from Budget Day.
What may change?
The main parties have ruled out any increase in Income Tax, National Insurance Contributions and VAT, but this leaves a question mark over IHT. The Labour Party has indicated a desire to reform IHT to increase public revenue and promote economic equality.
Proposals have included lowering thresholds and tightening the current rules on reliefs, which could include business relief and/or agricultural relief.
What should you be doing?
Whilst change is inevitable, particularly where there is a change of a Government, it is a good time to consider your position and your future intentions and aims.
For example, if you are concerned about your IHT exposure, considering making gifts, or looking at succession planning, it’s a good time to have a ‘healthcheck’. This will help to ensure you are making informed decisions that optimise your position as much as possible. This may include looking at Trusts, Family Investment Companies or more simple but effective planning to help ensure your assets or wealth are protected.
Please note that when considering your lifetime IHT planning you also need to understand the impact this may have on your capital gains tax (CGT) position (our article on ‘CGT and the General Election’ can be found on our website).
If you would like to discuss any concerns that you may have, please contact PEM.
This article was correct at time of publication.
