How does the recent Budget affect capital gains tax, income tax and inheritance tax?
The lack of an increase to capital gains tax, income tax or inheritance tax in this week’s budget would be welcome news to some. But is it really all that it seems?
For weeks before the budget there was a real concern amongst investors that capital gains tax (CGT) rates would rise. The chancellor announced he is not raising CGT, income tax or inheritance tax (IHT), which is welcome news to many, but freezing the thresholds till 2026 does bring a hidden tax cost.
As the economy recovers there is hope that investments, be that in shares or property, will rise in value. Limiting the CGT threshold means that those rises are more likely to result in CGT being payable on assets when sold. At Trethowans we can advise you on legal ways to ameliorate your CGT such as making the most of your spouse’s allowance or using a trust to defer the tax.
When it comes to IHT, the freezing of the thresholds is likely to have an even bigger impact. The nil rate band (the amount at which IHT is paid at 0%) has been £325,000 since 6 April 2009. During the last 10 years some sources estimate that property values in the UK have risen by as much, if not more than, 40%. Admittedly during that time the government introduced the additional allowance for those who leave their homes to their descendants but this is subject to several caveats meaning not only do those without descendants not benefit but even those with descendants may not benefit. It is yet to be seen how much property prices will increase over the next five years whilst the allowance remains static.
What this shows is the importance of taking pro-active steps to minimise your IHT liability. For most IHT planning you need to survive at least 7 years from the planning you do, so it is important to start sooner rather than later. There are several reliefs and exemptions that people can take advantage of and there are a number of ways in which wills can be drafted tax efficiently. For example, did you know that gifts of excess income can be immediately exempt from IHT if certain criteria are met? Did you know that if you are a couple and you leave everything to one another you could be causing the surviving spouse to lose the home allowance because of the value of the aggregated estates? A trust in your wills could prevent the loss of this allowance.
So whilst there were no outwardly nasty surprises for CGT and IHT in the budget, my view is that the freezing of the allowances means taking steps to mitigate your tax and ensure your wills are tax efficient is more important now than ever.
Read more here about minimising your inheritance tax liability.
For more information please contact our Wills team on 0800 2800 421 or get in touch here.