The UK Autumn Budget 2024 is looming, and with it comes growing speculation about possible changes to Inheritance Tax (IHT) and Capital Gains Tax (CGT). These potential reforms could significantly affect individuals with substantial estates, family-run businesses, and investors.
Proposed Changes to Inheritance Tax (IHT)
Inheritance Tax has long been a contentious issue in the UK, and the upcoming Autumn Budget may introduce some major changes. Currently, business owners and farmers can benefit from 100% relief on inheritance tax through Business Property Relief (BPR) and Agricultural Property Relief (APR). This allows estates containing business or agricultural assets to pass on wealth without incurring heavy tax burdens, facilitating succession within families. However, reports suggest that these reliefs could be capped at £500,000 per person, meaning that any value above this would be subject to the standard IHT rate of 40%.
If such a cap is imposed, it would particularly impact family businesses and agricultural estates, which are often valued well above this threshold. Additionally, there are even rumours that these reliefs could be abolished altogether, which could force the sale or dismantling of family businesses just to cover IHT liabilities. This would not only affect individual families but could also have broader economic consequences, especially since SMEs are a major source of employment in the UK.
Another change that might be introduced is a reform to the nil rate bands, which allow estates to pass the first £325,000 tax-free, with an additional £175,000 allowance for the family home if it is left to children or grandchildren. Any changes to these thresholds would be controversial, but they could be adjusted to generate additional revenue for the government
The Uncertain Fate of Potentially Exempt Transfers (PETs)
Potentially Exempt Transfers (PETs) allow individuals to make significant gifts during their lifetime, which become exempt from IHT if the donor survives for seven years after making the gift. However, it is speculated that the government might remove or reform this exemption, which would mean immediate IHT could be triggered for larger gifts. This potential change could complicate estate planning for individuals wishing to pass on wealth during their lifetime.
Capital Gains Tax: Aligning Rates with Income Tax?
The speculation around Capital Gains Tax (CGT) changes in the Autumn Budget focuses on the possibility of aligning CGT rates with Income Tax rates. Currently, the basic CGT rate is 10%, while the higher rate is 20%. Rumours suggest that the government could increase the basic rate to 18% and the higher rate to 28%. This move would effectively bring CGT in line with the tax rates applied to income, and it could have significant revenue-generating potential for the Treasury.
In addition, the government recently reduced the CGT allowance, and further reductions may be on the cards. While the current allowance of £3,000 is expected to remain unchanged, any gains above this limit would be subject to the new, potentially higher rates. These changes could take effect immediately following the Budget announcement, which might catch some property owners and investors by surprise.
Moreover, Gift Holdover Relief—which allows for the deferral of CGT when gifting business assets—might also be targeted. Removing this relief could lead to immediate CGT liabilities when business assets or shares are transferred to family members, making succession planning more challenging for family-run enterprises.
Implications for Families, Investors, and Businesses
For family businesses, these changes present a challenge. The removal or capping of BPR and APR would significantly increase the tax liabilities faced by heirs, potentially forcing families to sell portions of their businesses or farms simply to cover the tax bill. This could disrupt long-standing enterprises, especially for those that are asset-rich but cash-poor, such as agricultural estates.
Investors and property owners also need to consider the impact of potential CGT increases. If CGT is aligned with income tax rates, investors could face much larger tax bills when selling assets that have appreciated in value. This may prompt some to review their portfolios and consider making sales before the Budget announcement. The timing of these potential changes is critical, as the government might aim to implement these new rates immediately, preventing a rush to sell assets at the lower, existing rates.
What Should You Do Now?
With so much uncertainty surrounding potential changes to IHT and CGT, those likely to be affected should take steps to review their financial planning strategies. If you are considering major asset transfers or sales, it may be wise to consult with a tax advisor now, rather than waiting for the Budget. Here are some key considerations:
- Review Estate Plans: If you have significant assets that could be subject to IHT, review your estate plan and consider whether there are any steps you can take now to mitigate future tax liabilities. This could include gifting assets or placing them in trusts but be aware that such actions could also come with tax implications if the rules change.
- Assess Your Investments: Investors may want to assess their portfolios and identify assets that might be worth selling now to lock in the current, lower CGT rates. Immediate action could be beneficial, particularly if the government decides to increase CGT rates in the Budget.
- Seek Professional Advice: Navigating inheritance and capital gains taxes can be complex, especially when major changes are on the horizon. Consulting with a tax professional could help you understand your current liabilities and plan accordingly.