The recent budget proposal has sparked concerns about potential hikes in Inheritance Tax (IHT) and Capital Gains Tax (CGT), which may affect many individuals planning their estates. If these changes are implemented, they could increase the tax liabilities on inherited assets, significantly impacting the wealth passed down to loved ones.
Why Are These Changes Happening?
With growing government spending and economic challenges, there is increased pressure to find additional revenue sources. Inheritance Tax has traditionally affected estates over the nil-rate band threshold, currently at £325,000 per person. However, changes to the IHT rate or threshold could impact a broader range of families, reducing the amount beneficiaries receive.
Capital Gains Tax, currently imposed on profits from asset sales, may also face adjustments. With discussions around aligning CGT rates with income tax rates, individuals could see their tax bills increase, especially when passing down assets like property or shares. These potential changes highlight the importance of proactive estate planning.
Potential Inheritance Tax and Capital Gains Tax Changes: What to Expect from the Budget and How to Prepare
With the possibility of upcoming tax changes in the budget, it’s important to understand how these adjustments could impact your estate planning, especially around Inheritance Tax (IHT) and Capital Gains Tax (CGT).
Key Revenue-Raising Proposals:
Scrapping Business & Agricultural Property Relief: These reliefs currently allow certain business and agricultural assets to pass on with reduced or no IHT. Removing them could mean heavier tax burdens on family-owned businesses, potentially affecting continuity and local economies.
Reducing the Nil-Rate Band: The nil-rate band has been frozen since 2009 at £325,000. A reduction would bring more estates into the IHT bracket, affecting families with moderate wealth who previously wouldn’t have faced IHT liabilities.
Abolishing the Residence Nil-Rate Band (RNRB): Introduced to reduce IHT on primary residences passed to direct descendants, the RNRB has been criticised for favoring those with valuable properties. Removing it could simplify the system but would increase the tax burden on families relying on this relief.
Tightening Gifting Rules: The 7-year rule allows larger gifts to become IHT-free if the donor survives for seven years. Extending this period or removing it would limit options for reducing taxable estates through lifetime gifting.
Excluding Aim Shares from Business Relief: AIM shares currently qualify for IHT relief, incentivising investment in small UK companies. Removing this relief could discourage these investments and impact small businesses.
Applying CGT on Death: Currently, gains on assets held until death are wiped out, allowing beneficiaries to inherit them at current market value. Applying CGT upon death would mean that estates might face both CGT and IHT, leading to higher tax liabilities.
Including Defined Contribution Pension Pots in Estates: These pension pots are currently exempt from IHT. Including them in estates or taxing withdrawals as income could change retirement planning strategies, as pensions are often used to pass down wealth tax-efficiently.
Preparing for Possible Increases in IHT and CGT
If you’re concerned about the impact of these potential changes, there are several strategies you can explore:
Make Use of Gifting Allowances: Annual gifts within the current allowance can help reduce your taxable estate, particularly if done well in advance of any major life events.
Set Up Trusts: Trusts can be an effective way to transfer assets, shielding them from IHT while also giving you control over how and when your assets are passed on.
Review Your Will and Estate Plan Regularly: By keeping your estate plan updated, you can stay ahead of tax changes and ensure your assets are distributed according to your wishes.
Consider Life Insurance Policies: Some individuals choose to use life insurance to cover potential IHT liabilities, providing liquidity to cover taxes without selling off family assets.
Consult a Financial Adviser: With tax laws in flux, working with a professional ensures you’re making informed decisions that align with current regulations.
How Toucan Law Can Help
At Toucan Law, we specialise in helping families navigate the complexities of estate planning and taxation. If you’re concerned about potential changes to IHT or CGT, our team can provide personalised guidance to help you protect your wealth for future generations. Contact us today to ensure you’re prepared for whatever the future may bring.
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