As we approach the Labour government’s Autumn budget on 30 October 2024, it’s an important time for individuals and business owners to reassess their estate planning strategies, particularly in light of potential changes to inheritance tax (IHT) and capital gains tax (CGT).
With Chancellor Rachel Reeves recently unveiling a £22bn deficit in public finances, there is growing speculation about how these fiscal challenges will be addressed. While increases in income tax and VAT have been ruled out, other areas of taxation may be under review, and that could have a significant impact on estate planning.
In this blog, we will explore some of the possible changes, what they could mean for estate planning, and the steps you can take to prepare. Now is a critical moment to ensure that your affairs are structured in a way that protects your assets, maximises tax efficiencies, and ensures your wishes are carried out effectively.
Possible Changes to Inheritance Tax (IHT)
For many families, inheritance tax can have a substantial impact on the wealth passed on to future generations, particularly where the value of estates has increased significantly over time.
IHT is primarily a tax which is levied on the value of a person’s property and other assets when they die. Although at first glance it is paid by estates worth more than £325,000 (or £650,000 for a married couple or civil partnership), in practice, the current threshold rules mean that many estates can pay a lesser amount of IHT or avoid it completely.
While the government has not to date confirmed whether reforms to the IHT regime shall be announced, and if so, what these changes shall look like, IHT is an obvious choice for a new government looking to shore up public finances.
This speculation is given more weight, given the Prime Minister’s warning over the summer that the October 30th Budget will be “painful”, and that “those with the broadest shoulders should bear the heavier burden”. IHT is perceived by many as a tax aimed at wealthy people.
Those without significant assets do not have to pay IHT. However, more wealthy people are also able to minimise their IHT liability or avoid it completely by undertaking complex estate planning to take advantage of various exemptions and rules around gifts that are currently in place.
If the Chancellor wishes to raise more revenue using IHT, there are a number of ways of doing this:-
- Raising the 40% rate at which IHT is charged would increase the amount payable by chargeable estates, without affecting the number of estates that would have to pay IHT.
- Reduce the value of the basic and residence nil rate bands. This would result in far more estates having to pay IHT. It has to be borne in mind that such a move is likely to prove hugely unpopular.
- Changing the rules regarding exemptions and gifts. This could be sold to the public as “tidying up” or “clarifying” the existing regime, which are seen by many as overly complicated.
Possible Changes to Capital Gains Tax
Capital Gains Tax (CGT) is a tax levied when a person sells a non-cash asset, such as a second home or shares in a company, and where that sale results in a profit or “gain”. You pay the tax on the difference between what you paid for the asset and what you sell it for, minus “allowable expenses”.
The rules relating to CGT are complicated, and again, any change could be packaged as simplifying the rules.
Commentators have speculated that an increase in CGT rates could be an “easy win” for a government keen to give the impression of improving public finances. Similarly, it aligns with Labour’s stated policy that it is the wealthy that should pay the most to make up the deficit, even though it is a misconception that only rich people pay CGT.
Ministers have been discussing changes to CGT for years. The Office of Tax Simplification – disbanded by Chancellor Kwasi Kwarteng in 2022 – published a report suggesting that £14 billion per year could be raised by aligning CGT rates more closely with income tax rates.
Similarly, the government may widen the list of types of assets that are subject to CGT when sold. Currently, ISAs, Enterprise Investment Schemes (EIS) and government bonds (gilts) are all exempt from CGT.
Implications for Estate Planning
Estate planning is always a crucial consideration, but in times of potential legislative change, it becomes even more vital. The Autumn budget may introduce alterations that could take immediate effect on 30 October 2024. If you are considering any significant transfers of assets or sales, it is worth acting quickly to avoid being caught out by unexpected changes.
Here are some of the key areas we advise you to consider:
- Urgent Review of Wills and Lifetime Gifting Strategies
As potential changes to tax laws may take effect almost immediately, we advise all our clients to review their current Wills. Wills that were drafted with the existing tax framework in mind may no longer be optimised under new legislation. It may be possible to make use of current reliefs and exemptions before any changes come into force, particularly when it comes to lifetime gifting strategies.
Accelerating planned lifetime gifts could allow you to take advantage of the current rates and reliefs before they are altered. For those who have been considering transferring assets to family members or loved ones, now may be the time to act to lock in the current benefits.
- Review of Business Assets and Succession Planning
For business owners, the potential for changes to Business Property Relief (BPR) is a critical concern. At present, BPR can provide up to 100% exemption from inheritance tax on eligible business assets. However, this is another area that could face reform in the upcoming budget.
Similarly, succession planning is more important than ever. If you are looking to pass your business on to the next generation, now may be the time to speed up those plans, particularly if BADR is restricted or abolished. Any significant changes to these reliefs could greatly increase the tax burden on those looking to transfer their business assets.
- Trust Arrangements and the Role of Discretionary Trusts
Trusts can play a significant role in estate planning, particularly in tax efficiency and succession planning. A Discretionary Trust (DT), for example, allows trustees to manage assets on behalf of beneficiaries, giving flexibility in the distribution of those assets and potentially offering tax benefits.
When transferring shares that qualify for business relief, a DT may be used to avoid incurring inheritance tax charges. While capital gains tax may apply, it can be deferred through holdover relief, allowing you to minimise the tax impact. If CGT rates are set to rise, transferors may wish to consider paying CGT at the current rates on certain assets rather than deferring the tax.
It’s important to carefully weigh up the benefits of setting up or adjusting trust arrangements, particularly in light of potential changes. Trusts are a powerful tool, but they must be structured correctly to ensure they offer the maximum benefit under the new legal framework.
Key Considerations Moving Forward
With so much uncertainty surrounding the Autumn budget, it’s essential to be proactive. Here are some action points to consider in the lead-up to the budget announcement:
- Conduct an Urgent Estate Review
Take this time to review your overall estate plan, ensuring it reflects both your personal wishes and any potential tax efficiencies. - Obtain Up-to-Date Valuations of Your Assets
It’s critical to have accurate, up-to-date valuations of your assets, particularly business interests, to ensure you are well-positioned to make any necessary changes following the budget announcement. - Review Your Succession Plans
For business owners, now may be the time to accelerate succession planning, particularly if tax reliefs such as BADR and BPR are restricted. - Set Up or Adjust Trusts
Consider whether setting up new trusts or modifying existing ones could help to optimise tax efficiency in the event of legislative changes. - Update Your Will
Ensure that your Will reflects the current tax landscape, particularly in light of potential changes to inheritance tax.
“As we approach the Autumn budget, it’s more important than ever to ensure your estate planning is aligned with the potential changes in tax legislation. Acting now can provide peace of mind and help secure the future of your assets under the best possible terms.” – Alex Sealy, Partner & Head of Wills and Probate.
Get in touch
The Autumn budget is set to be a key moment for estate planning, with potential changes to both inheritance tax and capital gains tax on the horizon. Our estate planning experts are here to help guide you through these uncertain times, ensuring that your assets are protected and your wishes are carried out effectively.
If you are concerned about how the upcoming Autumn budget may affect your estate planning or inheritance tax position, we encourage you to get in touch with our team. You can get in touch by filling out our online contact form or by giving us a call on 0330 111 3131.