What should I do ahead of the Budget?

This time last year, Rachel Reeves was looking at a fiscal black hole, and there was widespread speculation about what she might do to raise taxes.  Despite all the rumours, there were some unexpected announcements last October, including the changes to the taxation of farm and business assets.

We’re back in the same place again, but a bigger black hole that needs to be filled.  It’s impossible to predict what the Chancellor might decide, but once again rumours are swirling and after all, the ship of state is the only ship that leaks from the top (thank you, Sir Humphrey Appleby).  So are there any steps you can take to protect yourself against the potential changes to inheritance tax and capital gains tax this time around?

Let’s look at some of the rumours.

1.Potential changes to lifetime gifts

The Chancellor may restrict the ability to make outright lifetime gifts (known as potentially exempt transfers or PETs).  PETs are gifts which are not immediately subject to inheritance tax (IHT), and if the giver survives for seven years and doesn’t continue to use the asset, it falls out of their estate for IHT purposes.  That period may be extended (e.g. to 10 years), or may be abolished altogether (so that any lifetime gifts are brought back into account when the taxpayer dies, no matter how long ago).  It’s also possible that there will be a cap on the value of gifts that any taxpayer can make each year, before they become immediately taxable.

Another possible tweak for the Chancellor would be to remove the rules around what is known as “taper relief”.  This is the tax rule that reduces the IHT payable on a gift where the giver dies more than three years, but less than seven years, after making that gift (note that the value of the gift isn’t reduced, so this is only a benefit where gifts in excess of the nil rate band have been made in the seven years before death).

If there are changes to the PET and gifts regime, it is likely they will only come into effect for gifts made after budget day, so any gifts made in advance are more likely to be taxed on the existing basis.  As always, think carefully about proposed gifts, see here for more information: Consider your options: How estate planning early can help your loved ones in the future.

2.Gifts made out of income

This is a very generous regime, and essentially allows a taxpayer with excess income to make regular gifts out of that income, which are not counted as gifts for IHT purposes.  That means that, even if the giver dies within seven years of making the gift, the value of the gift won’t be included in their estate for IHT purposes (i.e. it overcomes the need to survive for seven years), as explained here https://ts-p.co.uk/insights/give-early-give-often-but-only-give-what-you-can-afford/.

The rules around both what counts as income, and also how to demonstrate the necessary intention to gift, are complex, so take advice in advance of starting the required pattern of giving.  If done correctly, this is a valuable relief for those with income they are not fully using.  If the rules change in the Budget, hopefully gifts made before that date would be taxed on the current basis.

3.Deeds of variation

At the moment, after someone dies, it’s possible for their beneficiaries to “rewrite” their will, changing its provisions.  This is often done because the will is very out of date, or even because the deceased never wrote a will.  Almost always, a deed of variation reduces the IHT payable on someone’s death, and allows effective tax planning to be carried out (see https://ts-p.co.uk/for-you/protecting-passing-on-wealth/making-a-post-death-deed-of-variation/).  A deed of variation won’t always work:  all the affected beneficiaries need to agree to the changes, and if any are minors, or have lost capacity, it’s often not possible to draw up a deed of variation.  By removing this preferential treatment, the Chancellor is likely to increase IHT receipts.  The simplest way to avoid your estate being affected is to review (or draw up) your will, and ensure that it not only achieves your wishes but does so as tax effectively as possible.

4.Changes to capital gains tax

This time last year, changes to the rates of capital gains tax (CGT) were anticipated, leading to a surge in asset sales and gifts.  It’s possible that the Chancellor will increase the rates again, or further reduce the scope of allowances (such as Business Asset Disposal Relief).  There isn’t much scope to reduce the annual exemption any further (it’s currently set at £3,000), and it’s unlikely that she would remove principal private residence relief (the relief from CGT when a taxpayer makes a gain on the sale of their main home) completely, as this would have a substantial impact on the housing market.  The difficulty here is that to avoid any potential rate increase, it would be necessary to dispose of the asset now, potentially triggering a CGT charge.  Having said that, there are some types of gift where it is possible to hold over the gain, such as gifts to certain trusts, or of certain assets.  That would allow the asset to be sold at a later date, potentially when rates were lower, or when beneficiaries could use their own allowances, or lower rates of tax, against the gains.

Before rushing out to make gifts, though, it’s important to take advice as tax isn’t usually the only factor.  If you are considering gifting for IHT reasons, you need to understand the CGT consequences and vice versa.  You also need to understand the restrictions on what you can do so that you don’t fall into the ever-expanding anti-avoidance regime (such as the rules around gifts with reservation of benefit).  Other considerations include whether you might need access to those funds in the future.  You will also want to think about the type of gifts you make, and for whose benefit:  if you are thinking about helping your grandchildren or are concerned about how the recipient might manage the money (either due to health issues, or financial or matrimonial difficulties), would a trust be suitable for you?  It can take time to work all this out.

Other planning which isn’t related to this autumn’s budget, but should be progressed in any event includes:

• If you own assets which currently qualify for agricultural or business relief for IHT, you will already be aware that the rules are changing next April. If you haven’t already started considering your options, you should take advice urgently as planning in this area is complex and can take longer to implement for example due to the need to obtain valuations.  You can find more detail on this here https://ts-p.co.uk/insights/the-increasing-importance-of-inheritance-tax-planning-for-farmers/
• Is your estate planning up to date? This covers everything from ensuring assets are held between spouses to allow each of them to take full advantage of reliefs where available, to making sure your insurance policies are held in suitable trusts and don’t fall into your estate.  Have you signed any relevant pension death benefit forms?  This is even more important after the IHT changes to pensions announced in the last budget.  Are your wills and Lasting Powers of Attorney in the right form?

There are rumours that changes to financial products will be made (again): possibly restrictions on contributions to cash ISAs, reductions to pension contribution limits, restrictions to pension salary sacrifice and the 25% lump sum are all being discussed. Speak to your financial advisor to decide whether it’s appropriate for you to take any steps in advance of the budget.

I would always say that tax is never the only factor to take into account, but if you are thinking about estate planning, and potentially making gifts, it would be sensible to start that conversation as soon as possible. It can take time to get the necessary advice and prepare the relevant documents. Most lawyers and IFAs were overwhelmed with requests for last minute advice in advance of the budget last year, so starting that process earlier means you are more likely to achieve your aims.

If you have any questions, our expert team is here to help.