Many individuals are passing on their wealth in anticipation of possible changes to Inheritance Tax (IHT) in Labour’s first Budget on 30 October.
Should you consider doing the same?
Do you know what the value of your Estate is and your potential IHT exposure under the current rules?
Under current legislation:
- Each individual is entitled to a nil rate band of £325,000 and potentially a residence nil rate band (RNRB) of £175,000 against the value of the family home – providing it is left to children and/or grandchildren on death. Thereafter, the current rate of IHT on the remainder of your Estate is 40%.
- An unlimited exemption occurs where assets are transferred during lifetime and/or on death to the surviving spouse (or civil partner). If the deceased spouse’s nil rate bands have not been used, they are available to the surviving spouse which potentially increases the tax-free amount on the death of the second spouse to £1 million – but if the Estate on death exceeds £2 million, the RNRB is reduced by £1 for every £2 that the estate exceeds £2 million. Consequently, for wealthy couples the RNRB reduces to nil where the value of the estate exceeds £2.7 million leaving just the combined nil rate bands of £650,000.
- There is 100% relief from IHT where qualifying business and farming assets are transferred during lifetime and on death. It is hoped that these reliefs will continue so the next generation do not need to sell assets to pay the IHT. However, it is thought that these reliefs may not be as generous under the new government.
Gifts during lifetime?
Under current legislation, no IHT is payable where you survive seven years following the date a gift is made. Such transfers are called ‘potentially exempt’ transfers (PETs) and IHT is only payable should you not survive the seven years. To ensure a gift is effective, it is important that an outright gift is made (i.e. you can’t continue to use or enjoy an asset gifted).
There may also be Capital Gains Tax (CGT) consequences of a lifetime gift of an asset – although, in certain circumstances, it may be possible to defer the capital gain and the CGT payable. It is important you check which relief you may be entitled to before making the gift.
In recent announcements, our new chancellor has been silent on changes to capital taxes such as IHT and CGT. If you, like us, are expecting changes and would like to think about taking action before 30 October 2024, call us on 01223 810100 to discuss your thoughts.
