What can we expect?
According to The Guardian, the Labour Government is looking to introduce further changes to UK inheritance tax. These changes would represent a further squeeze on planning opportunities available to families, following the abolition of the non-dom regime (2025), reforms to agricultural and business property relief (2026), and bringing pensions into chargeability (2027). With these successive yearly reforms, do we have further reforms on the horizon and how might they impact succession plans?
Turning to the latest attempt by the Treasury to gauge public sentiment, ministers are considering introducing:
- a lifetime cap on gifting; and
- changes to taper relief that reduces IHT rates on gifts made between three and seven years before death.
Under the current rules, any gift (of whatever amount) made more than seven years before death is typically exempt from IHT. As for taper relief, the rate of tax levied on gifts within that seven year period ranges from 32% down to 8%. In effect, the longer you live, the more you and your heirs are rewarded.
We can only speculate for now, but might a lifetime cap apply to the donor or the donee. For example, might there be a lifetime gifting cap of £1 million to be applied across any number of beneficiaries and once that £1 million cap is hit (even if distributed among, say, 15 recipients), an immediate tax charge arises, much like a gift tax? Or, would the Government look to apply a cap on each donee (or recipient) of, say, £100,000. If this amount is exceeded, then again, it triggers a lifetime gift tax on the excess.
Beyond the speculation, with the Government exploring a range of options (including a wealth tax) to help overturn their £40 billion hole, the reality for clients is that traditional planning might soon be severely curtailed.
What to do?
If introduced, the new cap could squeeze succession and tax planning further, resulting in far greater tax liabilities and possibly the sale of assets if gifting in delayed. Combined with the reforms to APR and BPR, delayed gifting could lead to the fragmentation of family ownership of assets and businesses. A potential reform to taper relief might add insult to injury, whatever form this ends up taking.
There are, of course, other considerations to gifting including potential capital gains tax implications and the loss of control, so gifting may be as much of a psychological burden to overcome as well as one that is fiscal in nature. Given the capital gains tax element, there is always the risk of double taxation which is perhaps its own standalone article.
When should we act?
Lawyers typically answer with ‘it depends’. However, with the ongoing erosion of IHT reliefs, the time is NOW. Don’t wait until the Budget, as there will likely be anti-forestalling rules preventing you from acting once there’s ‘clarity’ means it’s too late by then.
Client’s should therefore look to:
- Maximise current exemptions: Gifts made today under the current system still benefit from full taper relief and the seven-year exemption window;
- Use every available relief: Annual exemptions (e.g., £3,000 per year), ‘gifts from surplus income’, wedding gifts, and small gifts are still intact, but these may become more restricted with anticipated reforms;
- Avoid being caught off guard: Future reforms may apply retrospectively to gifts made after certain dates or impose cumulative limits such that any delay could further erode your ability to gift tax-efficiently.
In summary
If you have assets you can afford to gift, there is no time like the present. The Guardian article is a warning of what is to come and so clients should act with certainty of the current system noting that there is a window of time before any future reforms become law.
If you have any queries relating to inheritance tax and gifting, please contact Ben Rosen of Quastels LLP.
