With the budget looming there has been lots of speculation about what areas the government may target to fill the ‘£22 billion black hole’ in the public finances. Much of this speculation has centred around there being significant changes to how Inheritance Tax (IHT) will be charged and with it being reported that only 4.39 % of all UK deaths resulted in an IHT bill in the 2021-22 tax year it could be seen as a trouble free and timely way for the chancellor to increase funds.
Until the budget happens no one can be sure of what the final result will be but below I take a look at some of the rumours that have been circulating:
1. Changes to exemptions.
Under the current regime any assets left to a spouse are exempt from tax and do not use up a person’s nil rate bands. This then means when the surviving spouse dies their estate can transfer any using any of the personal nil rate bands not used leaving many with the ability to leave up to a £1millon IHT free.
The chancellor could either limit the amount that could be passed to a spouse tax free meaning the percentage of estate being taxed would increase and/or stop the transferring of nil rate bands which would mean anything over £500,000 would be taxed on the surviving spouse’s death. With many family homes being worth more than £500,000 alone, this could see a significant increase in estates incurring IHT liabilities.
2. Changes to how gifts are taxed.
It is widely known if you make a gift more than 7 years before your death it will not be included in any IHT calculation. However, it has been publicised that the chancellor is considering increasing this to 10 years meaning more gifts would be captured in an IHT calculation.
There has also been rumours that there will no longer be any timeframe for gifts but instead an overall upper limit on the amount of lifetime gifts a person can make tax free or a tightening of the rules relating to gifts over a certain size.
3. Changes to Reliefs available
There are two main reliefs that can be applied to IHT liabilities. The first is Business Property Relief (BPR) and can be used to reduce IHT liabilities against certain business assets including Aim market shares.
The second is Agricultural Relief which was intended to allow family run farms to pass on to the next generation without incurring huge IHT liabilities which would result in farms needing to be sold.
These both offer up to 100% relief on assets that fall within their scope, and it is estimated that in the 2021-22 tax year between them they sheltered £4.5billion of these assets from IHT. Therefore, if the chancellor either introduced a cap or abolished these reliefs revenue from IHT could greatly increase.
4. Changes to Pensions
Currently most pensions fall outside the IHT calculation to incentivise people to start preparing for retirement but removing this could be an easy way for the chancellor to ensure many more people are pulled into the IHT net and lead to a huge increase in revenue for the Government relatively quickly.
No matter what the budget brings what you can be sure of is that I and my colleagues will be keeping up to date with all the IHT developments so make sure you keep a look out for future articles and please get in touch if you want any more advice.
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