Following the All Party Parliamentary Group’s report on the reform of inheritance tax in January 2020, there was much speculation that its two major recommendations for the government to reform the current IHT regime would be implemented in the most recent budget.
The first recommendation made by the APPG was to introduce a flat rate gift tax payable on lifetime and death transfers at a rate of 10% over an annual allowance of £30,000 on lifetime gifts in place of the current (generous) system of exemptions and reliefs which offer valuable IHT planning opportunities. Under the current regime, gifts made in lifetime (known as “potentially exempt transfers”) are exempt from IHT if you survive 7 years from the date of the gift. Taper relief is also available to reduce the IHT impact if you survive between 3- 7 years. In addition, specific and valuable IHT exemptions are available for transfers in lifetime and death of business property including private trading company shares, LLP and partnership interests as well as assets used in a busines, and agricultural property including farm land, farmhouses and farm cottages.
The second recommendation was to abolish all reliefs other than spouse and charity exemptions and the tax-free capital gains tax (CGT) uplift on death would be abolished. There would be a death allowance at a similar level to the current nil rate band (£325,000) to ensure that small estates not currently paying tax will remain unaffected by the changes.
Perhaps surprisingly given the high economic cost of the COVID pandemic, Budget 2021 did not deliver these much rumoured changes. However, we consider that reform is likely inevitable and it may be prudent to make sensible use of low CGT rates and IHT reliefs & exemptions whilst they are still available. That said, it is important not to view estate planning solely through the lens of IHT; careful attention should also be given to the capital gains tax implications and asset protection consequences.
If you would like further advice and assistance, contact our expert Trusts and Estates team on 01244 354800.
