In light of the recent General Election and Labour’s plans for public spending, the question must be raised as to how the Government will raise the necessary funds to cover the proposed public spending. It is no secret that Labour are supportive of wealth taxes.
Prosperity Law’s Head of Private Client, Charlotte Keating, has provided a little bit of insight into where we may expect to see change over the coming years and exactly what this means for estate planning:
The landscape for estate planning is a moving feast, and with a new Labour Government, we can certainly expect further changes to arise over the coming years. Now, more than ever, we live in a time when taking a holistic approach to estate planning is vitally important given the high tax society that we currently live in; you will only maximise tax savings by looking at all the reliefs and structures available to you. In this article, I’ll outline some of the possible changes to the ever unpopular ‘death duties’ and where we might expect to see changes in the tax regime, in the future.
Nil Rate Bands
Since the 2009/10 tax year, the ‘tax free’ amount that a person can leave on death before IHT is paid (known as the Nil Rate Band (NRB)) has been frozen at £325,000.
The Conservative government, being a supporter of the abolition of IHT, introduced the Residence Nil Rate Band (RNRB) as an addition to the NRB, worth an additional £175,000 of IHT exemption to those eligible, thereby reducing the amount of IHT that bereaved families pay on the death of a loved one.
The Labour Manifesto was suspiciously quiet about IHT. But we do know that they have previously opposed the abolishment of the tax completely and are very much in favour of wealth taxes.
Given that Labour have pledged not to increase Income Tax, National Insurance, VAT or Corporation Tax and the new Chancellor has openly declared that “there is not a huge amount of money”, increased national revenue must be raised by alternative means, with growing fears of an attack on family wealth.
With the IHT thresholds being frozen at the current rates, until at least April 2028 and, with the rate that house prices are increasing, many more families will find themselves falling into the IHT trap.
Whilst the new Government are unlikely to increase the rate of IHT or reduce or remove the NRB, questions are to be raised as to whether there would be a change to the RNRB due to the discriminatory nature of this relief, only applying to individuals with children and property. In a world where more and more couples are choosing not to have children and, in some cases, not to own property – it could be that Labour will ‘level the playing field’ in this respect. Whilst it is likely to take some time for this to take effect, I suspect that this relief will either be scrapped, with or without an increase in the NRB.
Business Property Relief (BPR) and Agricultural Relief (APR)
Should the Government wish to raise IHT receipts indirectly, this could be done by reforming relief available to estates. BPR and APR are the most valuable reliefs available providing either a 50% or 100% exemption from IHT on qualifying assets.
It has previously been reported that Labour intend to ‘look at every single tax break’ and if a raid on IHT is the way to raise national revenue, a review of these reliefs would be an easy target.
There have been widespread reports that Labour is considering reforming both of these reliefs, so much so that Family Business UK responded by releasing a statement damning the move. What would reform look like? I think the most likely reform would be a cap on the value exempt.
That said, it is hard to imagine how the new Government could do so without harming family-run businesses. Protecting employment and working people are key to Labour’s aims and as well as being a valuable relief from the perspective of Estate Planning, it’s also an effective way of protecting family run businesses and the jobs they create.
Lifetime gifting
To avoid making major changes to the headline Inheritance tax rates and regulations, lifetime gifting is another area where Labour could enact substantial change. Again, we have absolutely no detail here from the Manifesto, but we could perhaps see changes to the allowance amounts, or the period of time extended for gifted amounts to be exempt from IHT.
What this all means
Amidst all this uncertainty, what we can be certain of is that changes to the existing tax regime are likely and this will affect those who have plans in place for their estates. We know that Capital Gains Tax is going to be an area of focus for the new Government, and potentially the above reliefs that allow those to plan efficiently. That said, IHT is a deeply unpopular tax with the British public, and this alone might limit change that is in any way drastic.
In terms of timings, we’re equally as unsure when we will receive more clarity around changes that are to come. We can expect there to be more detail provided in the Autumn Statement in October, with the potential that we could see some changes in April 2025. One thing is certain – for those utilising any of the above reliefs in their existing estate plans, or, if you don’t have a plan in place for your estate – it would be prudent to discuss this with your Solicitor. If you’d like to have a confidential discussion about your plans, please get in touch with me at charlottek@prosperitylaw.com or call us on 0161 464 7595
