How May Tax on Gifts and Inheritance Change?

With Government debt approaching £400 billion it seems likely that tax increases may be included in the Budget due on 3rd March. Those wishing to make gifts to family members may need to consider how any changes could affect their plans or impact longer term inheritance.

In December the self-styled Wealth Tax Commission made up of academics from the London School of Economics and Warwick University proposed a one -off wealth tax of 5% on all personal wealth for individuals with £500,000 or more. https://www.aspirafp.co.uk/aspira-inform/wealth-tax-proposals-target-mid...

Rishi Sunak rejected the idea of a new wealth tax earlier in the year.  It seems more likely that tax increases will arise on capital gains tax and inheritance tax. Moreover, the Office of Tax Simplification (OTS) has set out proposals for reform of these taxes.

The Proposals Made to Government

Inheritance Tax

  • Gifts from surplus income which are currently wholly exempt, to be reviewed.
  • A small gifts exemption of £250 per recipient, to be increased to take account of inflation.
  • An annual allowance of £3,000 per donor, carried forward for one year, to be increased.  
  • Gifts in consideration of marriage or civil partnership to be withdrawn and included in the higher annual allowance.
  • Outright gifts made 7 years previously, on which the tax payable tapers after 3 years, to be cut to 5 years, with no taper allowance.
  • Business property relief, including shares listed on the AIM market and owned for over 2 years, to be removed unless the shareholder has a controlling interest in the business.
  • The OTS commented that the nil rate band of £325,000 which applies to all estates on death and any gifts made in the previous 7 years, had not been increased since 2009 but did not make a recommendation to increase it. However, it lamented that the residence nil rate band of £175,000, where a family home is passed to a direct descendent was complex to understand and administer. Could these two allowances be merged to provide a higher level of tax exemption for all estates?
  • Another issue identified with the nil rate band, where lifetime giving has taken place, is that the exempt amount is used up by the first gifts made, so that once the £325,000 allowance has been used later gifts bear all of the tax due. This can cause conflict in families where one beneficiary has received a gift much sooner than the others and pays less tax.  The OTS propose that the nil rate band  should be apportioned across all lifetime gifts made.
  • Life assurance policies currently form part of an estate and suffer tax on the claim unless written in trust. The OTS proposes that where these are limited term policies, they should be exempt from IHT. This would still leave whole life policies, which pay out whenever death occurs, subject to IHT unless placed in a trust.

Capital Gains Tax

Capital gains is levied on the capital profits made, less costs and allowable losses, when selling or gifting capital assets such as land and buildings or shares. There is an annual allowance of £12,300 per person so that tax is only charged on net gains, when sold or gifted, if above this. But the annual allowance is available on a use or lose it basis.

There is an exemption on transfers between spouses and civil partners who can double up on the annual allowance by transferring assets prior to disposal.

On death any gain inherited is “uplifted” so that the inherited asset has a base value for capital gains as at the date of death. This rule is often a reason for investors to adopt a long term buy and hold strategy.

On Capital Gains the OTS would: -

  • Reduce the annual allowance to £3,000 per person.
  • Increase the tax rates in line with income tax rates.
  • Remove the capital gains uplift on death so that all gains tax would be taxable.

Things to Consider

  • Realising gains and losses on long held investments within the current annual allowance.
  • Making use of annual exemptions for gifting, and for larger gifts, consider the timing.
  • Reinvesting realised gains in tax wrappers which offer tax exemptions such as Individual Savings Accounts and pensions. 

We will be monitoring the Budget and updating our advice in the light of any changes. If you would like advice in the meantime, please contact your usual Aspira adviser or info@aspirafp.co.uk Tel 01454 632 495.

Kay Ingram                              
Public Policy Director                               
January 2021            

Please remember, no news or research item is a recommendation or advice to buy. Aspira Corporate Solutions is not responsible for accuracy and may not share the author’s views. The contents of this blog are for information purposes only and do not constitute individual advice. All information is based on our current understanding of taxation legislation and regulations. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts.       

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