Proposed inheritance tax reforms
and pre-Budget planning

5 February 2020

Let’s start by saying that our position has always been, and remains, that it’s never wise to take tax planning steps that you wouldn’t otherwise consider on the back of rumour or double-guessing what changes might be made in an upcoming budget.

Conversely, planning steps already in contemplation or a business deal about to be done might sensibly be better completed before the Budget (on the basis of current legislation) than run the risk of an adverse tax change appearing in the Budget.

For the most part , the essential ingredients of the inheritance tax regime have remained unchanged for 35 years, save for the introduction of transferable nil rate bands in 2007 and the additional residence nil rate band in 2017 - despite the annual rumour that agricultural and business property reliefs might be abolished.

That inheritance tax is generally loathed more than any other (with Stamp Duty, perhaps, a close second) and is a political “hot potato” has long since been acknowledged. It was only a matter a time before the very essence of inheritance tax was thoroughly reviewed.

That time has arrived with the All-Party Parliamentary Group report on “Reform of Inheritance Tax”.

The report's wide-reaching recommendations

The report, published in January, makes a number of recommendations including:

  • The abolition of the ability to make lifetime gifts (“potentially exempt transfers”) of unlimited value that fall out of account after 7 years. Instead, a charge of 10% -20% on total gifts exceeding £30,000 in any year is proposed. There is no differentiation between outright gifts and gifts into trust. Trusts will pay an annual charge rather than every ten years as at present.
  • The abolition of the Residence Nil Rate Band; and gifts over the nil rate bands to be taxed at a flat rate of between 10% and 20% ( perhaps 10% on the first £2 million and 20% thereafter)
  • The abolition of agricultural and business property relief but the ability to pay tax on death by ten annual instalments ( with interest).
  • The abolition of Capital Gains Tax (CGT) uplift to date of death for both lifetime gifts and gifts on death there’ll be automatic “holdover” – the recipient will pay CGT on their gain and the donor’s /deceased’s gain when the property is sold. Ultimately, this part of the value will be taxed twice.  The preservation of principal private residence exemption to the date of death for the family home will be retained.
  • The abolition of gift with reservation rules which will no longer be necessary if lifetime gifts are to be taxed in any event. 
  • Liability  to tax (on overseas assets) to be determined by residence rather than domicile. Changes to the deemed domicile rules will restrict the numbers of non-domiciled, but resident persons will be required to make an “Excluded Property Settlement” (almost indefinitely outside the inheritance tax net) where the beneficiaries are UK resident.


Some of the implications of the proposals

Implementation of the proposals would not change the expected overall annual tax take. But the contributions to the pot by different wealth groups would change:

  • A greater number of smaller estates would now be exposed to tax, with the abolition of the Residence Nil Rate Band and the loss of the CGT uplift on death.
  • Medium sized estates would bear less of the burden with the reduction in the rate from 40% to 10% (and/or 20%).
  • Larger estates would pay more. These estates are more likely to contain agricultural and business assets, and the deceased more able to afford to have made lifetime gifts.


Pre-budget planning

Whether all or any of the recommended changes will find their way into Mr Javid’s Budget on 11th March can’t be known and shouldn’t be double guessed.

Nevertheless, where certain thoughts to mitigate inheritance tax (or otherwise to deal with family assets where inheritance tax rules might impact) are already contemplated, it may well be best advice to act now...

A cash gift (perhaps to a child to help with a property purchase)

As of today, a cash gift of any size will fall out of account after 7 years. In future, gifts over a £30,000 annual allowance might be taxed at 10% or 20%).


A transfer of the family home (of any value) into joint names with a child who lives with you

Currently, the value given will fall out of account after 7 years - and proportionate sharing of household expenses means the “gift with reservation of benefit rule” won’t apply. CGT is not an issue as the principal private residence will apply both to the gift and to any sale by you both in the future.

And if the Reservation of Benefit Rule is abolished in the future, as proposed, you may be spared the risk – under current legislation - of the rule kicking in at a later date if your child moves out (because they’ve married, for example).


Changes in the ownership of the family farm or business - perhaps bringing a child into partnership or giving them company shares

An abolition of Agricultural/Business Property Relief would likely mean that the gift would be chargeable to lifetime inheritance tax though the CGT hold-over relief would be maintained. Generally, one assumes that one of the proposed motives of the proposed abolition of the reliefs and loss of CGT uplift on death is for farmers and business persons to bring the younger generation on board sooner, rather than later. Such business sense has not hitherto been encouraged by a tax regime that gives a financial incentive to hold on to the family farm or business ‘til death

Non domiciled persons contemplating an Excluded Property Trust who have been tax resident here for 10 years but not the 15 years that currently deem one domiciled for tax purposes, might be spurred to finalise the trust before the Budget.


... Or not

lifetime inheritance tax

As of now, the true lifetime “gift tax” is CGT. A parent wanting to give say, a stocks and shares portfolio to mitigate inheritance tax is dissuaded by the charge to CGT (at 20%) on such disposal (unless the value to be given is less than the nil rate band so that the gift can safely be made into trust without lifetime inheritance tax and the gain can be “held over”).

If the proposals for lifetime inheritance tax are implemented, payment of a low rate of inheritance tax now (as opposed to the same rate later) without an immediate charge to CGT might be attractive if the assets given are expected to increase substantially in value. 


Gifts into trust

Lifetime trusts of a value in excess of the nil rate band that currently attract lifetime inheritance tax at 20% are rarely created. But if such a trust is in contemplation ( and you’d been ready to take the 20% charge on the chin), then a reduction in the rate to 10% might produce a substantial saving (even though the nil rate band will likely be abolished at the same time). 


Contact us

With inheritance tax provisions and planning likely to enter a state of flux, it’s more important than ever to take professional advice before embarking on any intended inheritance tax planning.

For more information on the issues raised in this blog and on inheritance planning  opportunities please speak to James Ward or Jim Sawer.

Latest blogs & news

#FreeBritney - How her sad case would never happen in the UK

Deputies are typically appointed because individuals cannot make decisions for themselves due to illness, like Alzheimers or dementia, old age or perhaps as a result of a catastrophic personal injury or medical negligence. 

Financial Abuse – how to spot the signs

There are several reasons why someone may need the assistance of a financial deputy, stemming from incapacity due to an accident or a consequence of old age. There is however a darker side to this type of work that Court of Protection lawyers are seeing more and more of. This relates to those who have suffered some form of financial abuse and/or undue influence.

Managing compensation after a spinal injury

After a spinal injury the long-term impact on your life and that of your families can be significant. You may need a care package, a new home or adaptations to their existing accommodation, therapies and specialised equipment.

Death in the digital age – continuing your online life

The pandemic has changed the world – there is no doubt we are all “online” far more now than before. Social media now extends into every aspect of our lives, from those notorious repetitive baby pictures to those ‘should never have been posted university photos‘. We collect and share moments of our lives in the digital world.

Should I set up a joint lasting power of attorney for my mother?

In the latest edition of the Financial Times Money Q&A, Jemma Garside, senior associate in our private client team answers a question: "Should I set up a joint lasting power of attorney for my mother?"

I am an attorney – can I make gifts on behalf of a donor?

Subject to any restrictions or conditions in the Lasting Power of Attorney (“LPA”), a property and affairs attorney can make gifts on the donor’s behalf to the donor’s friends, family members or acquaintances on customary occasions. 

Going through a divorce? Don’t forget to update your Will!

Going through a divorce process is stressful. There are lots of things to think about and one of these is likely to be what you should do to protect your hard-earned money.

I’m an attorney under a Lasting Power of Attorney – what happens next?

A donor must have the mental capacity to make a Lasting Power of Attorney (“LPA”) for property and affairs and health and care. The completed LPA is then sent to the Office of the Public Guardian (the “OPG”) for registration. Each page of the registered LPA will be stamped with ‘VALIDATED-OPG’.

Business LPAs - How to safeguard against a future incapacitated partner, director or shareholder?

As a business owner/shareholder, what would happen to your business if you were unable to make decisions – would someone be able to authorise payments or enter into contracts and keep the business running? 

Lasting Powers of Attorneys for business and professional affairs

Lasting Powers of Attorney (LPAs) are vitally important documents. Our previous blogs have touched upon what LPAs are and top tips for anyone planning on putting an LPA in place. Most individuals should at least put in place a financial LPA to cover their home and personal finances. It is however a good idea in some cases to have a second financial LPA.

Don’t make an awful year even worse…Separation and Capital Gains tax

The last 12 months have put an awful lot of pressure on the family unit and sadly this has led to a spike in separation and divorce amongst married couples. With the end of the tax year fast approaching (last day Monday 5th April – Easter Monday) it is timely to consider the tax consequences of separations.

ACC Guidance update – when does a deputy need COP approval for legal work?

Whilst managing the property and affairs of another person a Deputy appointed by the Court of Protection may come across issues that require them to pay for legal advice and assistance on their behalf. Examples could include purchasing a property, challenging a care plan or obtaining advice about a dispute. 

Nothing like bad succession planning to ruin a good reputation

Partner and head of our Private Client team, James Ward, writes about the importance of entrepreneur's putting in place a succession plan to safe guard their reputation. 

Ten top tips of Lasting Powers of Attorney (“LPAs”)

LPAs are important, and are steadily growing in popularity as individuals realise how necessary they are to support friends and family in the event that they lose mental capacity. Our previous blog gave an overview of how LPAs work and the requirements for making them. This time, we focus on our ten top tips for LPAs.

What are Powers of Attorneys?

A Power of Attorney is a very important estate planning tool, especially when an individual loses capacity. Whilst the term ‘Power of Attorney’ seems to be thrown around a lot, it is often misunderstood or not used correctly. In fact there are several different kinds of powers of attorney that can be used for different purposes.

Estate Planning 2021 – Looking beyond COVID-19

As we find ourselves in another national lockdown, the New Year presents an opportunity for individuals to review their assets and conduct some succession planning.

Discretionary investment management and Lasting Powers of Attorney

Phoebe Alexander and JIm Sawer blog about lasting powers of attorney and engaging Discretionary Investment.

“Hello, can you hear me?” – video-witnessing of wills to be made legal in England and Wales

Big news was announced by the Government at the end of last month: legislation will be introduced to allow remote electronic witnessing of wills – including for some that have already been made – in a significant amendment to the long-standing requirements. However, it will only be temporary.

Capital Gains Tax – Take steps now to avoid a likely “tax grab”?

Chancellor  Rishi Sunak has asked the Office of Tax Simplification to review Capital Gains Tax (“CGT”). CGT is charged on the profit/increase in value on sale or gift of assets. The rates are 18%-28% on disposals of residential property and 10%-20% on other assets.  There’s an annual exemption of £12,300 per taxpayer. Disposal of your main residence is tax free and “Entrepreneurs Relief” may see the first £1million of the gain on the sale of a business charged to CGT at the lower rate of 10%.

Lost Will - Lost Inheritance?

On the death of a person known to have made a Will, it’s pretty rare that the Will can’t be found...

Share insightLinkedIn Twitter Facebook Email to a friend Print

Email this page to a friend

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.

Leave a comment

You may also be interested in:

Skip to content Home About Us Insights Services Contact Accessibility