Associate solicitor Kirsti Harvey, in our Wills, Probate, Tax & Trusts team, looks ahead to the Government's autumn budget and speculation that changes involving Inheritance Tax or Capital Gains Tax could be on the way.
The new Chancellor, Rachel Reeves, recently confirmed that the Government will set out its fiscal plans in an autumn budget on 30 October 2024.
In its General Election manifesto, the Labour Party and now Prime Minister Keir Starmer said that the new Government would not raise Income Tax, National Insurance (NI) or VAT during the course of this Parliament. This has inevitably led to speculation that other taxes may face increases, with changes to Inheritance Tax (IHT) and Capital Gains Tax (CGT) rumoured to be among the more likely.
On 20 July, the Chancellor said: "I think we will have to increase taxes in the Budget," whilst suggesting that there is a £20 billion shortfall in the public finances for this financial year meaning that savings need to be found.
What is Taxation?
In simple terms, taxes are a means by which the Government can seek to affect the decisions people make by making them more or less expensive, and therefore appealing, through taxation. The much debated ‘Stamp Duty Holiday’, introduced during the Covid-19 pandemic, is a prime example, whereby Stamp Duty Land Tax (SDLT) relief for buyers was introduced to help stimulate the struggling housing market at the time.
The Government raises around £1 trillion in tax revenue each year and this income is used to pay for public services including healthcare, education, welfare and social services, transport, environmental services, arts and culture, the emergency services and defence.
What is Inheritance Tax?
Inheritance Tax accounts for less than 1% of the Government’s annual tax take, yet it is perhaps one of the most debated and disliked forms of taxation and one that can have a significant impact on the beneficiaries of an estate.
IHT is paid on the value of a person’s estate (their property, money and possessions) when they die.
IHT is usually paid at a rate of 40% on the portion of an estate above the £325,000 Nil Rate Band (NRB). Any unused allowance can be transferred to a surviving spouse, which means that married couples can collectively bequeath £650,000 tax-free.
In addition, where an individual is passing on their main residence to direct descendants, including their children or grandchildren, the Residence Nil Rate Band’ (RNRB), introduced in 2017, provides an additional tax-free allowance of £175,000 per person, which is also transferable between married couples and civil partners. This means that, for some people, no Inheritance Tax will be charged on the first £500,000 of their estate (£325,000 + £175,000).
The Government may feel that there is an opportunity to increase the £7.5 billion received through IHT in the financial year to the end of March 2024 but it is important to note that nothing has yet been specifically said on the subject.
There is speculation that in the autumn budget the Government may remove certain exceptions, including a relief on family businesses and the ability to pass on agricultural land or pensions tax free.
Currently, any financial gifts given by a person in the seven years before their death are counted as part of their estate and may therefore be subject to IHT. It has been said that the Government could consider extending this seven-year period, to increase tax receipts.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is paid on the profits from the sale of any capital assets, which may include additional properties, business assets, shares and certain personal possessions (not cars) worth £6,000 or more.
At present, individuals are exempt from paying CGT on the first £3,000 of profits, or £1,500 if a Trust is involved.
Commenting on the subject, some experts have suggested that the Government could seek to remove those thresholds or impose CGT on assets for which it is currently not payable.
It has also long been highlighted that basic rate taxpayers pay CGT at a rate of 10% or 18% and higher or additional rate earners at 20% or 24%, far out of line with Income Tax rates. The Government could decide to bring CGT rates more in line.
What to Consider
The key to lessening tax liabilities is to begin planning as early as possible. It is another misconception that Inheritance Tax planning is only for the elderly and very wealthy. Unless you take early steps, the major beneficiary of your estate could be HMRC.
Where appropriate, incorporating discretionary trusts in your Will can maximise any Inheritance Tax reliefs that may be available. Some trusts are particularly useful for unmarried couples where the ‘Spouse Exemption’ is not applicable. Gifts of capital or excess income in lifetime to individuals or into lifetime discretionary trusts can also be helpful at reducing one’s inheritance tax liability. Making gifts to charities under the terms of your Will is also a useful method of IHT planning.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
