Inheritance Tax: What can we expect from the Autumn Budget?
The new labour government are facing potentially painful decisions in an attempt to fill the ‘£22bn black hole’ allegedly left in the government’s finances. So, we should be braced for potential impactful tax changes.
Inheritance Tax and Capital Gains Tax will they be a hot topic?
Labour have previously ruled out changes to rates of Income Tax, NICs, VAT and Corporation Tax. Therefore, it wouldn’t come as a surprise therefore if they turn to the remaining ‘big’ revenue raisers such as IHT and CGT.
Given that before the election, Labour’s manifesto made no mention of IHT, a complete reform of the tax regime should not be ruled out and it is speculated that it could be a hot topic in the upcoming Autumn Statement.
Therefore, we might expect Labour to put in more measures generate higher IHT revenue, having seen the upward trends recently. With up to £2.8 billion generated from April to July 2024 this year alone, this is already showing a significant increase of 9% from the same period in the previous year.
These changes could have significant implications for both business owners, and high net-worth individuals alike.
What is in place currently?
The most standard exemptions that are applied include the use of the Nil Rate Band of £325,000 (£650,000 for couples) and the Residence Nil Rate Band of £175,000 (£350,000 per couple). The NRB has remained fixed at this level since 2009, while the RNRB has been in place since 6 April 2017, benefitting those who wish to pass on the family home. A restriction applies for estates valued over £2 million, which tapers the level of RNRB available.
For those with businesses, the most notable and important relief is Business Relief (and Agricultural Property Relief). This provides an exemption of up to 100% of the value of any business property or agricultural property for business owners and farmers.
On the subject to exempt assets, any residual pension funds on the date of death are also free of inheritance tax.
A standard planning tool for many individuals has been to make gifts out of their estate within a seven-year window to ensure the value is removed from their estate. This considers that ‘potentially exempt transfers’ only fall within your estate if you pass away within 7 years of making the gift, with taper relief applying between 3-7 years.
Another tool is via the use of trusts. Currently, individuals can transfer value into a trust up to the NRB available (£325,000 or £650,000) every seven years. Any amounts above this impose a 20% lifetime IHT charge. Where assets are held in trust, a 10 yearly charge will apply, which is a maximum of 6%.
What changes could be put in place?
Nil Rate Bands
The £325,000 tax-free allowance has remained at the same level since 2009, and it was frozen at this amount by the Conservative government until 2028. This, along with increases in house prices is the main reason for the large increase in IHT receipts over the past few years.
There has been talk of instead abolishing the Residence Nil Rate Band (currently £175,000) and instead, raising the NRB to £500,000. This equates to £1,000,000 per married couple.
However, like in most budget decisions, where they give with one hand, we expect them to take with another – ways of which they could do this might include some of the speculations below.
Business Relief (and Agricultural Property Relief)
These are generous reliefs seek to incentivise individuals to invest or start-up their own businesses or farms. However, due to speculation, many clients are accelerating plans to gift such property to the next generation prior to 30th October, with a view to making the most of a relief potentially on the chopping block.
Plans are reportedly being considered for capping the benefit of both reliefs to just £500,000 per person. This means IHT could be payable at 40% on any value exceeding this amount.
It is also possible that other criteria to be tightened in this area, for example by extending the ownership period from 2 years, or introducing a minimum % holding requirement for shares.
Other news reports predict an abolishment altogether. However, we would expect this would at least be phased in to allow some succession planning opportunities for those affected. The affect could potentially force many family-run businesses to sell up just to afford their IHT liability.
Planning for Gifts
There has also been talk about overhauling the IHT system with a view to revising or abolishing the favourable seven-year rule. This provides an incentive for individuals to give away wealth during their lifetime. We would expect that this would take time to bring in and would at least allow for affected clients to plan ahead appropriately.
It could potentially rise to, say, 10 years but we think this is more unlikely as the additional revenue resulting from this change is unlikely to impact the Treasury in this current parliament.
The chancellor may introduce further IHT burden on trusts by increasing the 10 yearly charges from 6%.
Pensions
Its possible that residual pension funds might be brought within the scope of Inheritance Tax, or perhaps limit the amount that can be passed on IHT free.
Final thoughts
Of course, we do not know what the Chancellor’s plans are, and this is all just speculation. However, reforms can be introduced fairly quickly so it important to plan ahead.
We recommend advice is taken before any plans are put into place to ensure you are maximising the reliefs available to you and considering the impact of any rules introduced.
We will be monitoring the developments following the Autumn Budget to ensure our clients stay well informed of any rule changes.
Next Steps
If you are concerned about how Labour’s plans might affect you, please get in touch.
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