May 7, 2020 | BEN WAITE

IHT & Estate Planning – what next?

Published: 6th May 2020

 

As we approach what seems to be the next phase of dealing with COVID-19 we’re starting to look at what the future could hold – you can see our recent blog about what’s next for stock markets here.

At some point in the not-too-distant future it’s likely the government will need to increase taxes to pay for the support given to businesses and individuals throughout this difficult period.

We’re taking a brief look at what this could look like over the coming months: 

Changes to Inheritance tax (IHT) were on the agenda before COVID-19 hit and so it could be an obvious place for the government to start. But what was being discussed?

Business Property Relief (BPR) and Agricultural Property Relief (APR)

Currently, the value of many trading businesses and agricultural land falls outside the scope of IHT due to these reliefs. However, there’s potential for the rules to be aligned with capital gains tax, meaning the reliefs wouldn’t be as generous as before, or even scrapping them altogether as HMRC deem them too complex.

Capital Gains Tax (CGT) uplift on death

Currently, on death there’s no CGT and the value of the assets are uplifted to market value, meaning when an asset is sold shortly after death there may be little or no gain. This also avoids double taxation of IHT and CGT. However, there has been talk about abolishing this uplift where IHT relief or an exemption applies, such as the spouse exemption or BPR.

7 year clock

At the moment you can, in certain situations, pass on significant amounts of wealth free of IHT, provided you live for 7 years after the event. This 7 year clock could be abolished with a flat rate of tax being charged on the gift – there is speculation this could be in the region of 10%.

Exemptions and nil rate bands

There are various annual exemptions for IHT including the £3,000 annual exemption, £250 small gifts exemption, regular gifts out of income etc. All in addition to the gifts that can be made under the 7 year rule above.

There’s also the nil rate band and residential nil rate band, which means married couples can have allowances of up to £1m on death. Going forward, this could be reduced to an annual allowance of £30k, and a death allowance of £325k.

Flat rate

Under existing rules, IHT is only levied in a few circumstances during lifetime, and most of the tax gets paid on death. The rate is currently 40% where the estate exceeds the available nil rate bands. Another suggestion put forward is to have a flat rate of IHT to tax lifetime and death transfers of 10%, with this potentially rising to 20% for estates over £2m.

Trusts

If any of the changes come in, it could affect the way trusts are used. The ability to transfer £325k every 7 years into a trust would no longer be possible without an immediate tax charge.

Can I do anything now?

Now might be the time to make use of the 7 year rule while it’s around. Or, if you’re concerned about losing control over the assets, using a trust may be your best option.

Rest assured, for every question spinning around in your head, we’ve got the answers – our joined up approach means advice like this is just a phone call away. This blog was put together by our internal tax team – we can work with you and them to help with any questions you might have.

 

Tax and estate planning advice are not regulated by the FCA. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. This information represents our understanding of law and HM Revenue & Customs practice as at 7 May 2020 and may change if legislation changes.

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