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.
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).
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.