The pandemic has impacted the whole world in many ways since its onset in December 2019 and is still continuing to influence our everyday lives.  Changes to the inheritance tax and capital gains regimes that were being considered and proposed prior to the pandemic were essentially put on hold due to more pressing matters however as hopefully, we continue to emerge from the other side, these proposals will once again be at the forefront of the government’s agenda.

The government’s budget in April 2021 largely avoided tax increases in a bid to restart the economy.  However, the effects of COVID 19 on the economy remain with us all and the challenge ahead financially for the government is severe.  The Institute of Fiscal Studies (IFS) predicts the government will need to raise an extra £40 billion per year by the middle of the decade.  There it is inevitable that significant changes are coming and once these changes are enacted then we must all review our wills and investments and make sure that all possible preventative measures are being taken.

In the last budget, Chancellor Rishi Sunak confirmed that the Inheritance Tax Nil Rate Bands are to remain at the same level until at least April 2026 whereas they were due to increase with inflation this month.  Therefore as it stands at the moment, every individual benefits from what is called a Nil Rate band (which is a sum of money free from tax) of £325,000 (NRB).  Gifts between a husband and wife are exempt, therefore if a wife passed away leaving her estate to her husband, there would be no inheritance tax payable and when the husband then passed, his estate could not only claim his £325,000 but his wife’s £325,000 effectively giving £650,000 free from inheritance tax.

In addition, there is also a Residence Nil Rate Bank (a further sum tax-free) currently £175,000 (RNRB) which can be claimed when you leave your principal residence to a direct descendant.  Again, theoretically, a double exemption can apply for a husband and wife.  So potentially a husband and wife can claim up to £1 million free from inheritance tax if you consider the NRBs and the RNRBs.

As well as the above tax-free sums, there are further exemptions that may currently be applied for dependent upon your circumstances and that of your estate.

Current law and proposals

  • Seven Years?

A lot of us are familiar with the seven-year rule but many mistakenly believe that it applies to care home fees and the giving away of assets.  The later is partly correct however it is to do with inheritance tax and the giving away of assets.  You can make a gift of an asset or cash and if you survive seven years from the date of that gift, then the value of that gift is taken out of a person’s estate when calculating any inheritance tax payable.  This is what we call a Potentially Exempt Transfer (PET).  The gift is potentially exempt because no one knows what’s going to happen i.e. will the donor of that gift survive 7 years?  If the donor does not survive seven years then something called taper relief could apply after three years from the date of the gift and thus reduces the amount of tax payable on that gift. 

It is proposed that these will be abolished except between husband and wife.  Instead, all lifetime gifts will be chargeable to tax but with an annual exemption of £30,000 which would be available, up to which gifts would be tax free.  Further proposals include that all gifts above £10,000 must be reported electronically to HMRC.

It is also being considered that instead of abolishing the PETs in their entirety, the 7 years would be reduced to 5 and no taper relief would apply.

  • The current Nil Rate Band of £325,000

The Nil Rate Band of £325,000 would no longer be available to set off against lifetime gifts. Instead, the lifetime gifts would have a tax rate of 10% and then a further tax rate of between 10-20% would be applied to the rest of the estate depending on its size.

Abolish the Nil Rate Band and replace it with a death allowance but in essence, this seems like the same as a Nil Rate Band since a Death allowance would again be a sum of money free from tax, it has just been given a different title.

Abolish the Residence Nil Rate Band – This would reduce what a couple can potentially claim from £1 million to £650,000. The introduction of this allowance was always controversial, and it is the newest amendment to inheritance tax provided in 2017.

  • Capital Gains Tax Uplift abolished

Although here we are concentrating on inheritance tax, this would have significant effects on family succession planning. If the Capital Gains Tax uplift were abolished, under current rules, no Capital Gains is payable on assets transferred on death and the recipient inherits the asset at the date of death value.  However, imagine the implications if parents purchased property in 1974 for £8500 and both had passed in 2019 and left property to their daughter and it was now worth £180,000.  Currently no Capital Gains for daughter but if this uplift were abolished would she have to pay tax on the gain £180,000 less £8500 = £171500 x say 18/22/28%, in addition to inheritance tax.

  • Pension funds outside the estate. Life insurance and other death benefits free from IHT on death whether written into trust or not.
  • Amendment of General Exemptions

Amendment of General exemptions currently small gifts, Annual Exemption of £3000, weddings etc to be replaced by one large annual exemption and remove the current exemption out of income benefit

In addition to the above, The All Party Parliamentary Group for Inheritance and Integration Fairness (APPG IIF) proposed the following:

  • to reduce current tax charge from 40% to 10%.  This new flat rate would abolish inheritance tax in its current form and implement an entirely new system.
  • No more Business Property Relief (BPR) or Agricultural Property Relief (APR), instead tax payable over 10 years to safeguard farms and businesses.
  • For Estates more than £2million the flat rate increases to 20%

From reading the above, no final decisions regarding amendments have been made. These are just proposals and so for up-to-date legislation, tax, exemptions and inheritance tax planning always seek legal and financial advice from your chosen legal professional tailored to your circumstances and requirements.

As we have seen over the past year, who knows what the future holds for any of us.  The best thing we can all do is to try and plan as much as possible for the future as we know change is coming so for whatever that future may hold and watch this space!!!!


Author: Jemma Blake