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Rayner my parade! The importance of specialist advice.
Jemma Brimblecombe
So now we know. Despite a high-spending Budget, the Chancellor has resisted calls to introduce major personal tax changes in his latest balancing of the books.
We should not forget, of course, that a major tax change was already announced a few weeks ago in the form of the National Insurance (NI) increase to pay for social care. But given the enormity of the black hole in public finances following Covid-19, the fact Rishi Sunak did not resort to tampering with the most detested tax according to a recent poll - inheritance tax (IHT) - will be a relief to those it catches.
In March we were told that IHT bands will remain frozen until 2026 and thus far the Chancellor has been good to his word.
This means that subject to steering around the various anti-avoidance measures, those with estates worth more than £325,000 (or £650,000 for a married couple or civil partners, increasing to £1m where the family home is left to direct descendants) where an IHT liability would normally be due can continue to plan and take steps to reduce the bill payable by their loved ones.
Some of the popular measures for mitigating IHT include gifting, creation of trusts and investing in business assets that qualify for Business Relief. These are all legitimate ways to lessen the 40% tax bill that HM Revenue & Customs (HMRC) would otherwise levy.
Yet despite such wise action by some, IHT continues to make more and more money for the Revenue, largely due to rising property prices. I understand that in July 2021 alone, for example, HMRC's take in IHT receipts was more than £550m.
If the Chancellor is tempted to tweak the framework for IHT in future, it is most likely the 2019 report by the Office of Tax Simplification would be the playbook he would reach for.
The headlines of this report were as follows:-
- No rebasing of capital gains tax ('CGT') on death when a relief (such as business relief) or an exemption (such as spouse exemption) is available. The reason for this change was said to prevent people from holding off giving during their lifetime because of the CGT relief. However, in my view, the real reason was to clamp down on traditional planning using a spouse of business relief to gift assets down without CGT or IHT (after seven years).
- Removal of excess income gifting because it is complicated and underused. This may be underused in general but for clients with significant income this is a great exemption and has saved a huge amount of tax. Over complication is not the main reason for this exemption to go. In my view, it is the level of tax that is now saved on larger estates.
- Tightening up of business relief and agricultural relief. The rationale behind this would be to bring business relief in line with entrepreneur's relief. Again, this may seem to be fairer but actually, its main purpose will be to restrict this relief to genuine trading businesses where the shareholder is involved in the business.
- Consider removing taper relief and having the gifting window reduced to five years on a strict liability basis - i.e. no reduction if you die in that time frame. The reduction in time will make record keeping easier but the real reason is that taper relief can be incredibly effective for large gifts if you survive three years. However, on balance I believe all practitioners would welcome five years over seven years.
Overall the "simplifications" proposed above would on the one hand increase the IHT take for HMRC yet at the same time would not be so headline-grabbing to risk middle England support.
For the moment we can be thankful the Chancellor feels that IHT is working just fine and more than paying its way. However, a tightening of the regulations cannot be ruled out for the future to make IHT mitigation trickier just as the wealthiest section of society approaches their old age.
This article was originally published by Professional Adviser on 3 November 2021.
FURTHER INFORMATION
For more information on the issues raised in this blog, please contact James Ward, or a member of our Private Client team.
ABOUT THE AUTHORS
James Ward heads the Private Client team at Kingsley Napley and is tasked with overseeing the continued development of the private client offering for both existing and new clients of the firm. His objective is for the Private Client team to offer the highest quality legal, practical and commercial private client advice for both domestic and international families and individuals.
We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.
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