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Preserve it and save: how conditional exemption can protect your heritage... and your wallet
Charles Richardson
This has been one of the most anticipated/dreaded budgets for some time, with clear noises coming from Rachel Reeves that she is going to tax wealth. This has led to panic amongst anyone with investments, cash, valuable property, businesses and pensions. What does it mean for them and what should they do before the budget?
You just have to open any newspaper to get article after article setting out options to “protect” your money from the budget attack. The options are often around maxing pensions, maxing ISAs, making gifts….leaving the UK! Etc. But what is actually going to happen and what action needs to be taken?
First, it is important to note that no one knows apart from Rachel Reeves and the Treasury. They may not even know at the moment but it is safe to say that inheritance tax and Capital Gains tax are likely to be in the firing line. How extreme the changes will be are most likely to rest on their target audience. If they feel they are losing the middle they may soften the measures, but if they feel they need to placate the left, they may go full throttle. Also, it will depend on what money they need to raise. Both of the aforementioned taxes do not produce much revenue, so changes will have to be meaningful if they need to move the needle on the tax take.
It is also the case that Labour have only been in a few months, so do not expect wholesale changes of complex tax law. Potential changes like partial removal of Principal Private Residence or a Wealth tax would take some time to action and would need careful consideration. Whereas removing exemptions or increasing tax rates or already existing taxes are easier to implement. Also, this is the first of 10 budgets in this Parliament cycle, so Rachel Reeves does not need to get it done all at once.
What is likely to be considered by the Treasury is as follows:-
- An increase in the CGT rates. This will be different for the sale of residential property compared to other assets, but it is very likely that all rates will go up. The questions are, by how much? Will entrepreneur’s relief increase? Will we see a return of indexation? Will there be any rebasing? Will it happen immediately or will it be delayed until 6th April 2025? Mrs Reeves has already seen an increased tax take from gains since the election and another few months may benefit her further. It is worth clients looking at unrealised gains and to see whether they could crystallise the gains before October 30th. However, doing this at a significant discount is not sensible.
- Inheritance tax is very different to Capital Gains tax. With Capital Gains tax you can be proactive or you can sit back and not realise a gain. Whereas with inheritance tax, you do not know when this may become chargeable. Areas that may be changed without too much legislation amendments could be:
- Capital gains tax uplift on death where there is no inheritance tax chargeable; so when there is a spouse exemption or business property relief;
- Increase in 7 year rule or removal of taper relief;
- Removal of excess gifting;
- Removal of Residence Nil Rate Band;
- Extension of freezing of current nil rate band;
- Tax on pension transfers to non-exempt beneficiaries;
- Reduction in Agricultural Relief;
- Limiting use of Business Property Relief.
It is unlikely that they will have time to implement a gifting tax but this may happen at some point in the future. It is also unlikely they will increase the rate of tax but again they could charge more on bigger estates.
The major problem with most of those potential changes is that the tax point is on death and not now. So it is hard to trigger the tax to bring about a better result, aside from dying before the budget! Particularly on gifting it is hard to know whether that would be retrospective to gifts made prior to 30th October.
So, our advice is, consider what planning you want to do now. Provided it is for all the right reasons and not just a snap pre-budget action, then it is probably sensible to get it actioned before 30th October; such as gifting shares or cash or using trusts. However, just remember that once a gift has been made you are not going to get it back, so it is important to understand the finances of the donor after the gift.
With this in mind it is very important to seek the correct legal and tax advice when considering actions. At Kingsley Napley we can advise on all aspects of Estate and Tax planning.
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 author
James leads both the Private Client Department and Private Wealth Group at Kingsley Napley. He provides individuals and their families in the UK and abroad with a comprehensive, efficient and discreet private wealth service.
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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