We now have a date for the first budget of the new Labour government, taking place on Wednesday, 30 October, with speculation already rife on the tax changes that might be introduced.
With the new Chancellor, Rachel Reeves, recently revealing what she believed is a £22 billion black hole in government finances, it seems more than likely that tax increases, along with the cancelling of infrastructure projects, will be needed to plug the gap.
Labour has already ruled out increases to National Insurance Contributions, Income Tax and VAT in its manifesto, potentially paving the way for increases in the rate of Capital Gains Tax, Inheritance Tax and a reduction in Pension Tax Relief.
Lesley Sutton, Director from our Huddersfield office, looks at the changes Labour could make in these areas.
Scrapping business property relief
Under the current rules, the value of most family trading businesses is excluded from the charge to inheritance tax by claiming business property relief. Figures suggest that business property relief saves families as much as £1.4bn per year in inheritance tax.
This relief was first introduced to enable businesses to be passed down through the generations without having to be sold to pay inheritance tax. In addition to trading businesses the relief also applies to shares in AIM listed companies.
The government could withdraw this relief completely or limit it to a specific maximum amount (for example £1m). This would create a significant increase in the inheritance tax liability for many families.
Targeting pensions
Pensions can currently be passed onto your beneficiaries, and this would be free from Inheritance Tax. This relief means that it is possible to amass a sizable pension pot, which is left untouched, with spending coming from other savings, with the goal of passing this onto children inheritance tax free.
The Institute of Fiscal Studies is said to have urged the government to consider introducing inheritance tax on pension pots, estimating that this would raise up to £2bn over the next few years.
Capital gains tax uplift
All assets currently benefit from a tax-free uplift to market value at the date of death. In theory, it is possible to inherit a trading business, free from inheritance tax due to business property relief, and to sell it the next day, capital gains tax free.
However, this provision applies to all capital gains tax assets such as investments and property and not just to trading businesses. As a result, if this uplift was to be scrapped, families could be faced with paying not just inheritance tax at 40% but also 10% to 24% capital gains tax on the subsequent sale of investments.
There is no doubt that some changes are coming. How the changes will be made remains to be seen. We only have a small window of opportunity to review estates and to plan to minimise the impact of any changes.
Here to help
We are seeing a significant increase in families looking to gift wealth now, either directly or into trust, particularly where business property relief is currently available. If you would like to discuss your own inheritance tax position further, please contact us using the form below and one of our experts will be in touch.
