Chancellor Rishi Sunak’s budget focused on the UK’s road to recovery on the back of the Covid pandemic with Government forecasts showing borrowing at a record £355bn this year.
A fear of some tax nasties
Prior to yesterday’s budget, there was much speculation amongst private client practitioners whether Inheritance Tax (IHT) and Capital Gains Tax (CGT) would be targeted as a means by which to replenish the country’s coffers. Some commentators suspected CGT rates would double from 20% to 40% to match income tax, there was talk of a wealth tax and others anticipated wholesale reform to the inheritance tax regime.
A deep breath
As it turned out, Chancellor Rishi left both the IHT and CGT regimes untouched. In fact, he set the regimes in stone, freezing the allowances for CGT and IHT (together with the pensions lifetime allowance) until 2026. Currently a married couple with children can make use of IHT allowances to pass on up to £1 million without an IHT liability. Let sleeping dogs lie?
Is it as benign as it seems?
If one peers behind the curtain, one notices the freeze on IHT allowances follows a 12 year freeze on the nil rate band allowance from 6th April 2009 until 6th April 2021 (some of us practitioners who have never known any other value for the nil rate band were somewhat excited, as only private client specialists can be, by the forthcoming change). In practical terms, if the nil rate band had increased from 2009 in line with inflation it would be over £445,000 now. Consequently, a failure to increase the IHT allowances with inflation in the past is one reason why more estates now pay inheritance tax and why the government’s tax take from inheritance tax has increased year on year. With house prices in the UK continuing to rise and likely to do so in the next 5 years, for many families this may give rise to an inheritance tax or capital gains tax liability in the future.
Change for the better
Indeed, for several years prior to the Covid pandemic there were calls from various quarters for long overdue attention to the IHT system. The Office of Tax Simplification and the All-Party Parliamentary Group on Inheritance & Intergenerational Fairness have both recommended a simplification of the IHT regime which is both overly complicated and unfair. There must be many practitioners who regret the opportunity was not taken in this budget (a budget for the most unusual of times) to take the plunge and overhaul the IHT system.
With so many decisions to make as the end of lockdown creeps closer, chief amongst them where to go to get some sunshine, it would be easy to breathe a sigh of relief that there is no immediate impact on one’s estate planning plans.
However, we know the budget deficit is vast and Chancellor Rishi was clear there is some pain to come once the country is out of lockdown, the economy has got off its knees and life has returned to whatever normal is to look like. It seems likely, perhaps an inevitability, there will be a return to some of the above mooted changes in due course: the nasties together with the simplification.
Nothing announced by the Chancellor will restrict IHT planning and mitigation and we know the rates of IHT and CGT are frozen until 2026. Is it time to act now and to ensure one has the right planning in place before any likely overhaul in the future?