Home Finance Will Inheritance Tax see a massive overhaul this year?

Will Inheritance Tax see a massive overhaul this year?

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Inheritance tax labelled ‘unfair’ and ‘cruel’ by expert

Inheritance Tax was a tax under threat of major change, according to many economists, given the rising rates of the national debt in the wake of the coronavirus crisis. The Chancellor of the Exchequer Rishi Sunak is expected to proceed cautiously for fear of putting economic recovery at risk on March 3, but what changes could this mean for IHT? Express.co.uk speaks to experts about any likely changes to Inheritance Tax following the Spring Budget on March 3.

Inheritance Tax is a tax levied on estates which are inherited after someone has died.

This tax is applied to an estate, including the property, money and possessions, of someone who has died.

The amount one pays depends upon the full value of the estate which is based on the total asset value including:

  • Cash in the bank
  • Property
  • Business
  • Vehicles
  • Investments
  • Payouts from life insurance policies
  • (Minus any debts and liabilities).

Normally, you are not required to pay Inheritance Tax if the value of your estate is below the Nil Rate Band of £325,000 and you leave everything above the threshold to a spouse or civil partner, or if you leave everything above the threshold to an exempt beneficiary such as a charity.

If the value of an estate is above the Nil Rate Band then it will be classed as part of your estate and could be taxed.

The current Inheritance Tax rate is 40 percent.

For instance, if an estate is worth £625,000, tax will be charged on the £300,000 above the Nil Rate Band which means tax would 40 percent of this figure – £120,000.

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Inheritance Tax: Inheritance Tax

Inheritance Tax: Will Inheritance Tax see a massive overhaul this year? (Image: GETTY)

Inheritance Tax: Inheritance Tax talks

Inheritance Tax: The Budget will take place on March 3 (Image: GETTY)

The Chancellor of the Exchequer Rishi Sunak will deliver his Spring Budget on Wednesday, March 3.

Mr Sunak is preparing to announce several new measures designed to boost the UK economy in the wake of the coronavirus crisis.

During 2020, GDP in the UK, which is the value of everything produced in the economy, dropped by 9.9 percent compared to 2019.

The UK suffered the worst financial impact amid the pandemic of any G7 country.

This year’s Budget is expected to be one of the most closely watched in history, particularly in the wake of the pandemic and its huge economic fallout.

Those impacted by Inheritance Tax are eagerly awaiting any possible changes, but what do the experts think will happen?

Inheritance Tax: Rishi Sunak

Inheritance Tax: During 2020, GDP dropped by 9.9 percent (Image: GETTY)

Tasnim Khalid, Head of Wills, Trusts and Estate Planning at JMW Solicitors, told Express.co.uk: “We may see a limit to certain reliefs, such as potentially exempt transfer, or regular gifting out of surplus income.

“An All-party Parliamentary Group examined Inheritance and Intergenerational fairness at the beginning of last year and published a report which suggested that certain gifts and reliefs should be abolished.

“It recommended that it be replaced instead by one simple annual exemption of £30,000 and a lifetime rate to tax of 10 percent applied to all subsequent gifts.

“That’s half the current 20 percent rate for the limited range of gifts that are currently taxed as chargeable lifetime transfers.”

“We may also see restrictions on the availability of Business Property Relief for families, and there is also talk of abolishing the CGT uplift after death.”

She added: “IHT has not seen any significant changes for quite some time, thus a review is well overdue.”

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Inheritance Tax: Pensioners

Inheritance Tax: Inheritance Tax has not seen any real change in years (Image: GETTY)

Joe Cobb, Partner at JMW Solicitors, said he believes Mr Sunak will reduce relief options for people.

He told Express.co.uk: “There has been much speculation about what the Chancellor might change in the Spring Budget, with Inheritance Tax (IHT) appearing high up the possible list of changes.

“It is possible that the Chancellor might seek to restrict access to certain IHT reliefs, for example, the generous 100 percent relief applying to holdings of shares listed on the Alternative Investment Market, or seek to tinker with the tax-free amount.

“The introduction around five years ago of the ‘Residential Nil Rate Band’ – to give relief on residential homes up to the value of £175,000 passing to a direct descendant – was effected with poorly drafted and complex legislation, and it has the effect of lifting many people out of the scope of IHT.

“It might be that the Chancellor looks to remove this allowance.

“However, IHT is not simply a tax which applies on death; it also applies to complex trust structures and lifetime gifts and transfers of value. Making wholescale changes to IHT – such as implementing a ‘gift tax’ – will be extremely difficult in the short term.”

Mr Cobb added the only recent change to IHT has been the implementation of the Residence Nil Rate Band a few years ago.

He added: “This reflects, on the most part, the complexity of making wholescale changes to the regime, and the political difficulty in dragging more families into the IHT net.”

Inheritance Tax: IHT

Inheritance Tax: Some experts believe it may be too early for Mr Sunak to make any big changes (Image: GETTY)

Solicitor Ben Taylor at Roythornes Solicitors said potential changes could include a change to the number of lifetime gifts, changes to Agricultural Property Relief of Business Property Relief.

Mr Taylor told Express.co.uk: “My expectation, or perhaps hope, is that any changes to Inheritance Tax amount to a tinkering rather than wholesale revisions.

“The Wealth Tax Report indicated that people may be more accepting of a new tax or increase in tax on capital, and whilst IHT generates relatively low revenues it may be a popular area to target.

“There are a number of lifetime gifts, these may be reduced, and the annual exemption increased.

“It is unlikely but a change in the rate of IHT may be looked at, though perhaps this could be coupled with an increase in the nil rate band.

“Changes to Agricultural Property Relief (APR), possibly affecting relief on short-term letting, or perhaps targeting specific elements such as relief on farmhouses.

“Changes to Business Property Relief (BPR), such as the availability of relief on AIM shares.

“Personally, I hope that any changes to APR and BPR are carefully considered. Both reliefs were introduced for important policy reasons and are crucial for businesses across the country.

“Any changes to IHT may be influenced by what happens to Capital Gains Tax.”

Investment Analyst Rob Morgan at Charles Stanley Direct believes given the coronavirus pandemic, it may be “too early” for Mr Sunak to make any “radical changes”.

Mr Morgan told Express.co.uk: “Major changes to Inheritance Tax are possible, especially in relation to Potentially Exempt Transfers (PETs).

“These allow individuals to make gifts of unlimited value without being hit with any inheritance tax liabilities provided they live a further seven years.

“It’s possible that PETs could be abolished and that all gifts and transfers above a certain amount become immediately taxable.

“As part of any reform, the Chancellor would likely take the opportunity to tidy up the unnecessarily complicated rules surrounding exempt small gifts and consolidate them into one easily understood annual gifting allowance.

“Fully exempt gifts at present include an annual £3,000 lump sum, which can be given to one person or divided between a number of people, plus £250 a year to as many people as you like.

“There is also the somewhat nebulous ‘gifts out of income’ rule, which requires extensive record-keeping.”

These changes could likely mean there will be less opportunity to pass on wealth to the next generation without immediate tax consequences, especially for those looking to pass on large sums, according to Mr Morgan.

He added proper financial planning in this area will remain invaluable.



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