22nd October 2024

Budget Bingo – What can we expect from the Chancellor’s Autumn Statement?

A hot topic of conversation amongst Private Client professionals is speculating precisely what the Chancellor will announce on 30 October regarding Capital Gains Tax (CGT), Inheritance Tax (IHT) and associated reliefs. We know change is coming, and with our Bingo cards at the ready, what can we expect potentially?

It is important to emphasise that the following commentary amounts to no more than conjecture as to what the Chancellor will announce, and the tax landscape could be very different from the predictions made. On no account should changes to existing asset structure be considered based on this article’s content, which constitutes an academic exercise and not advice.

 

Capital Gains Tax (CGT)

Currently, CGT is charged at 24% or 18% on gains on property that is not a main residence property and 20% or 10% on stocks and shares, the rate dependent upon whether you are a basic or higher rate taxpayer. The tax is levied on gains over £3,000 if you are an individual and £1,500 if the assets form part of a Trust. The reduction of the upper CGT rate from 28% to 24% on property was partly to encourage second home sales to free up housing stock for local people in popular tourist areas. A rise in CGT, and certainly one above the previous rate of 28%, could curtail growth in this area which the government may be keen to avoid as it might stall tax receipts. For this reason, it seems unlikely that it will increase in line with IHT, although a change to the current rate may be expected, conceivably removing the two-tiered treatment of CGT rates with income tax rates.

It does seem more probable that the Capital Gains uplift on death (where valuation for CGT purposes of a property in an estate is by reference to the value at date of death) will be removed. The original purpose of the uplift was to avoid double taxation where a property in an estate was charged both to IHT and CGT. With less than 4% of estates paying IHT, and approximately 1 in 10 properties on the market being probate sales, this could be an easy way of increasing additional revenue.

A Parliamentary Paper “Capital Gains Tax Stage 1” introduced in November 2020 recommended that CGT rates increase in line with income tax and that the CGT uplift on death should be removed. This was not pursued further, but there is speculation that this could now be implemented, with potential relief available should a property be charged to IHT as well as CGT to avoid double taxation.

 

Inheritance Tax (IHT) and the Nil Rate Bands (NRB) 

IHT is currently charged at a flat rate of 40% over and above the current NRB/RNRB (or 36% if more than 10% is left to charity) subject to certain exceptions. It is estimated that only 4% of estates are chargeable to IHT, the revenue of which, according to the Office for Budget Responsibility (OBR), comprises 0.7% of all tax receipts. Whilst the receipts are rising year on year, to increase revenue at a greater rate it is possible that IHT could move to a more tiered system similar to income tax where a basic rate is applied on estates up to a certain amount and then increased thereafter. Alternatively, the Government could consider following a European model as used in France and Germany where the amount of IHT charged is linked to the relationship proximity between the beneficiary and the deceased and/or the beneficiary’s personal tax rate. So, a child of the deceased may have a more favourable rate of IHT applied to their legacy than a nephew for example, but it could also be subject to their income tax rate.

The NRB has been capped at £325,000 since 2009 and is not projected to rise until 2028. Before 2009 it rose every year. To compensate for this HMRC introduced the Residence Nil Rate Band (RNRB). This “new” RNRB is an oft-misunderstood relief. It is an overly complicated concept and arguably unfair that it is only available if you own property (albeit there are some exceptions) and on the basis that you can leave it to your direct descendants. Furthermore, it is only available in full on estates with a net value of £2,000,000 or less. Certainly, there is speculation that it may be abolished, but it would be viewed as harsh for it not to be replaced by some other relief – even if it is less favourable than the current RNRB. An alternative could be to increase the NRB to £500,000 per individual, but without any other changes, this would mean less revenue for HMRC which the government is unwilling to countenance; Any changes are therefore likely to be in conjunction with modification to the current Inheritance Tax regime.

 

Lifetime Gifting

Currently, gifts of up to £3,000 (subject to certain exceptions) each year can be made without any impact to the NRB. This limit has not changed since 1982. If this had increased in line with inflation, the gifting allowance would currently be approximately £10,400 per annum. Gifts over the annual allowance are subject to the 7 year rule such that any gifts made within 7 years of the date of death will reduce the NRB by the amount over the annual allowance. After 7 years, the NRB amount resets. These are known as potentially exempt transfers (PETs).

There is speculation that the Government may remove PETs altogether. This could be replaced with a bigger annual allowance coupled with a lifetime gifting allowance. This would allow families to help fund deposits, school fees and generally assist their children and grandchildren during their lifetime without being penalised on death or with an immediate charge to IHT at 20% where lifetime gifts to trusts over 7 period years exceed £325,000. Alternatively, they could seek to increase the 7 year rule to 10 or more. The difficulty with increasing the time frame however, is the availability of bank records to assess what gifts have been made beyond 7 years.

 

Non-Domiciles (‘non-doms’)

The Government has already set out their proposals regarding tax changes to non-doms resident in the UK. These involve abolishing non-dom status and replacing it with a special status for the first four years of tax residence in the UK. Thereafter, non-doms will be subject to the same regime as UK domiciles. In respect of IHT, the proposed changes involve determining IHT on the basis of tax residence rather than an individual’s domicile. Currently an individual is deemed domiciled in the UK if they have lived in the UK for 15 of the past 20 years – or if they were UK domiciled at birth and then changed their domicile, if they have lived in the UK for the previous 2 tax years; The new proposals are likely to bring more estates within the realm of UK domicile and therefore more worldwide assets subject to IHT.

Lifetime gifting by non-doms to their spouses (irrespective of that spouse’s own domicile status) could also change as a result. Non-doms currently have more favourable terms when it comes to gifting to a spouse and are entitled to unlimited relief when gifting UK assets – as is the case with gifting between two UK domiciled spouses. The relief however does not apply when a UK domiciled spouse gifts to a non-dom spouse. The lifetime gifting allowance in this case is limited to an additional £325,000 over the NRB for life and does not renew every 7 years in respect of the additional allowance. The government could plausibly adjust the unlimited relief currently available between non-domiciled spouses and align it with the rules applied to mismatched domicile where the donor is UK domiciled.

 

Business Property Relief (BPR)/Agricultural Property Relief (APR)

The reliefs offered by BPR and APR are extremely valuable to business owners and farmers alike and amount to around £3.2 billion a year. With such a gaping hole in UK finances, this seems an easy target for change with speculation that it could be abolished altogether. One of the purposes of BPR and APR is to preserve businesses for the next generation, and removal of these reliefs could result in the dissolution of many businesses (particularly smaller ones) and a large number of small family run farms. It is questionable therefore as to how much benefit, when offset against the economic disadvantages, removing the reliefs would bring. It seems more likely that, rather than getting rid of the reliefs altogether, the Government will cap the maximum amount that can be claimed, so that smaller businesses can survive. It is possible however, that they could instead seek to remove or greatly limit the relief available via investments in the Alternative Investment Market (AIM) so unquoted shares will be treated in the same way as quoted shares.

 

Pensions and Trusts

It has long been the case that assets held in pensions and trusts are exempt from IHT. Pension assets are held in trust in any event and as such do not belong to the individual, so do not fall into their estate for tax purposes. Legislation in this respect would have to be very carefully considered and it may be for the purposes of IHT only that pensions will in the future form part of the deceased’s estate. Pensions are an easy target in this respect, and this may be proposed as a way of preventing those that accumulate their pensions with no intention of ever drawing down as a pension income stream to encourage them to draw down so that income can then be taxed. Another possibility is that the Chancellor could announce a compulsory draw down from a certain age.

 

It is important to note that any changes made in respect of any of the above will need to be read together as a whole; Where one measure could appear quite draconian, it may be mitigated somewhat by a more favourable provision elsewhere. However, the purpose of any restructure is essentially to drive more revenue into the government purse and IHT and CGT are easy targets, particularly from those considered as wealthier estates by the current government.

Whatever the Chancellor announces, there is likely to be a frenzy of activity trying to understand how the new regimes may affect trusts and estates. We at Buss Murton will be studying the Chancellor’s budget carefully to assess the impact on our clients’ assets and how they can be best structured to ensure HMRC is not the primary beneficiary. But as far as forward planning goes, it is probably best to sit tight until the detail and extent of change is fully known on or after 30 October 2024.

Look out for the next instalment “Budget Bingo – the results are in” when we will comment on the changes to be implemented.

Annelise Tyler

Annelise Tyler
Chartered Legal Executive