Inheritance taxes and autumn budget

Inheritance taxes: what can we expect from the autumn budget?

The new Labor government faces potentially painful decisions as it tries to plug the “£22 billion black hole” allegedly left in the government’s finances. We should therefore prepare for possible impactful tax changes.

Will inheritance tax and capital gains tax be a hot topic?

Labor has previously ruled out any changes to the rates of income tax, NICs, VAT and corporation tax. It would therefore not be surprising if they turned to other “big” income generators, such as IHT and CGT.

Given that before the election Labour’s manifesto made no mention of IHT, a comprehensive reform of the tax system should not be ruled out and it is speculated that this could be a hot topic in the next autumn statement .

Therefore, we might expect Labor to introduce more measures that generate higher IHT revenues, having seen increasing trends recently. With up to £2.8 billion generated between April and July 2024 this year alone, this already represents a significant increase of 9% on the same period the previous year.

These changes could have significant implications for both business owners and wealthy individuals.

What is currently in place?

The most common exemptions applied include using the £325,000 nil rate band (£650,000 for couples) and the £175,000 residence nil rate band (£350,000 per couple). The NRB has remained fixed at this level since 2009, while the RNRB has been in place since April 6, 2017, for the benefit of those who wish to pass on family housing. A restriction applies to estates valued at more than £2 million, which reduces the level of RNRB available.

For those with businesses, the most notable and important assistance is business assistance (and farm property assistance). This provides an exemption of up to 100% of the value of any commercial or agricultural property for business owners and farmers.

Regarding exempt assets, residual pension funds on the day of death are also exempt from inheritance tax.

A standard planning tool for many people is to make gifts from their estate within seven years to ensure the value is removed from their estate. This considers “potentially exempt transfers” to only fall under your estate if you die within 7 years of the gift, with a phased relief applying between 3 and 7 years.

Another tool is to use trusts. Currently, individuals can transfer value into a trust up to the available NRB (£325,000 or £650,000) every seven years. Anything higher imposes a 20% lifetime IHT charge. Where assets are held in trust, a ten-year fee will apply, a maximum of 6%.

What changes could be implemented?

Zero rate brackets

The tax-free allowance of £325,000 has remained at the same level since 2009 and has been frozen at this amount by the Conservative government until 2028. This, along with rising house prices, is the main reason of the sharp increase in IHT revenue over the years. in recent years.

There has been talk of abolishing the nil rate band (currently £175,000) and increasing the NRB to £500,000. This equates to £1,000,000 per married couple.

However, as with most budgetary decisions, where they give with one hand, we expect them to take with the other – ways in which they might do this could include some of the speculations below.

Business assistance (and agricultural property assistance)

These are generous reliefs aimed at encouraging individuals to invest or start their own business or farm. However, due to speculation, many clients are accelerating their plans to donate these assets to the next generation before 30 years.^th October, with a view to making the most of possible relief on the chopping block.

Plans are reportedly being considered to cap the benefit of both reliefs at just £500,000 per person. This means that IHT could be payable at 40% on any value above this amount.

It is also possible that other criteria will be strengthened in this area, for example by extending the holding period by 2 years or introducing a minimum share holding percentage requirement.

Other reports predict total abolition. However, we expect this to at least be phased in to allow some succession planning opportunities for those affected. The impact could potentially force many family businesses to sell simply to meet their IHT liability.

Gift planning

There has also been talk of an overhaul of the IHT system with a view to revising or removing the favorable seven-year rule. This incentivizes individuals to give away wealth over their lifetime. We expect this to take time and at least allow affected customers to plan appropriately.

This could potentially be as long as, say, 10 years, but we think this is more unlikely as the additional revenue from this change is unlikely to impact the Treasury in this Parliament.

The Chancellor could introduce an additional charge for IHT on trusts by increasing decennial taxes by 6%.

Retirements

It is possible that residual pension funds could be included within the scope of inheritance tax, or perhaps limit the amount that can be passed on to IHT free of charge..

Final Thoughts

Of course, we don’t know what the Chancellor’s plans are, and this is all speculation. However, reforms can be introduced quite quickly, so it is important to plan ahead.

We recommend that you take advice before putting any plan in place to ensure that you maximize the reliefs available to you and consider the impact of any rules introduced.

We will monitor developments following the autumn budget to ensure our customers remain well informed of any rule changes.

Next steps

If you are concerned about how Labour’s plans could affect you, please contact us.