Many wealthy individuals are apparently passing on substantial amounts of their wealth in anticipation of possible changes to inheritance tax (IHT) in Labour’s first Budget on 30 October. This allegedly includes a number of high-profile individuals such as TV presenter Anne Robinson who confirmed that she had passed on £50 million to her children and grandchildren. Should you consider doing the same?
Firstly, you need to check with us the value of your estate and potential IHT exposure under the current rules. Currently each individual receives a nil rate band of £325,000 and potentially up to a further £175,000 against the value of the family home, provided it, or assets to its value, are left to direct descendants on death. This additional £175,000 allowance is referred to as the residence nil rate band (RNRB).
There is currently an unlimited exemption where assets are transferred during lifetime or on death to the surviving spouse or civil partner. If the deceased spouse’s nil rate bands are unused then they are available to the survivor, potentially increasing the tax-free amount on the death of the second spouse to £1 million. Unfortunately, it’s not quite that simple as where the estate exceeds £2 million the RNRB is reduced by £1 for every £2 that the estate exceeds £2 million. Consequently, for wealthy couples the RNRB reduces to nil where the value of the estate exceeds £2.7 million leaving just the combined nil rate bands of £650,000. Note that the current rate of IHT on the death estate is 40% once the nil rate band has been used.
There is currently 100% relief from IHT where business and farming assets are transferred during lifetime and on death and it is hoped that these reliefs will continue so that survivors do not need to sell off assets to pay the tax. However, those generous reliefs may not continue under the new government.
Transfers during lifetime
Under the current rules there is no IHT payable where the donor survives for at least 7 years following the date that assets are transferred. Such transfers are referred to as potentially exempt transfers (PETs) and IHT is payable should the donor die within 7 years. Note that the transfer needs to be an outright gift with no continued use or enjoyment of the asset by the donor. Hence, giving away the family home but continuing to live there will generally be ineffective unless other conditions, such as paying market rent, are satisfied.
There may also be capital gains tax (CGT) consequences of a lifetime gift, although it may be possible to hold over the gain so that no CGT is payable on the increase in value from when the asset was acquired. Holdover relief is currently available in the case of business assets and on transfers of assets into trust.
Please get in touch with us if you have concerns about IHT and want to consider taking action before Budget Day.
What else might we see? In other aspects of taxation, Labour has pledged a crackdown on tax avoidance and modernising HMRC.
The manifesto stated: “We will increase registration and reporting requirements, strengthen HMRC’s powers, invest in new technology and build capacity within HMRC. This, combined with a renewed focus on tax avoidance by large businesses and the wealthy, will begin to close the tax gap and ensure everyone pays their fair share.”
Labour has also pledged to publicise a roadmap for business taxation for the next parliament and to “retain a permanent full expensing system for capital investment and the annual investment allowance for small business”. The party also promised to give firms ‘greater clarity’ on what qualifies for allowances.
In the King’s Speech, the Government introduced a bill regarding what it called a “fiscal lock” – to ensure the Office for Budget Responsibility, the fiscal watchdog, assesses all tax and spending announcements. This was brought in in response to the so-called ‘mini-Budget’ of the Liz Truss premiership, which led to turmoil in the markets.
King Charles announced in Parliament: “Stability will be the cornerstone of my Government’s economic policy and every decision will be consistent with its fiscal rules. It will legislate to ensure that all significant tax and spending changes are subject to an independent assessment by the Office for Budget Responsibility. Bills will be brought forward to strengthen audit and corporate governance, alongside pension investment.”
The King’s Speech also included, among other things, one of the headline policies talked about during the General Election – the removal of VAT exemption for private school fees, and it was confirmed at the end of July when that will kick in. The 20% VAT charge on private school fees will begin in January 2025.
Need help understanding the implications of any of the new measures being considered or announced by the new Government? Get in touch.