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COVID-19: INHERITANCE TAX & ESTATE PLANNING

May 4, 2020

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At some point in the not-too-distant future, the government will need to increase taxes to pay for all the support given to businesses and individuals throughout this difficult period. We all agree that, right?

Inheritance tax is often seen as suffered by the wealthier end of the population. So, it would be an obvious one to increase without a huge outcry. On top of that, it was on the agenda for change pre-COVID. But what was being discussed?

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

Currently, the value of many trading businesses and agricultural land falls outside the scope of inheritance tax due to these reliefs. However, there’s potential for the rules to be aligned with capital gains tax, meaning the reliefs aren’t as generous as before, or even scrapping them altogether as HMRC deem them too complex.

Capital Gains Tax uplift on death

Currently, on death there is no capital gains tax and the value of the assets are uplifted to market value, meaning when an asset is sold shortly after death there may be little or no gain. This also avoids double taxation of inheritance tax and capital gains tax. However, there has been talk about abolishing this uplift where an inheritance tax relief or exemption applies, such as the spouse exemption or BPR.

7 year clock

At the moment you can, in certain situations, pass on significant amounts of wealth free of inheritance tax, provided you survive 7 years. This 7 year clock could be abolished with a flat rate of tax being charged on the gift – 10% has been mentioned.

Exemptions and nil rate bands

There are various annual exemptions now for inheritance tax including the £3,000 annual exemption, £250 small gifts exemption, regular gifts out of income etc. – in addition to the gifts that can be made under the 7 year rule above. Then, we also have the nil rate band and residential nil rate band, which for a married couple means we can have allowances of up to £1m on death.

Going forward, this could be reduced to an annual allowance of £30k, and a death allowance of £325k.

Flat rate

Under existing rules, inheritance tax is only levied in a few circumstances during a lifetime, and most of the tax gets paid on death. The rate is currently 40% where the estate exceeds the available nil rate bands. But another suggestion put forward is to have a flat rate of inheritance tax to tax lifetime and death transfers of 10%, with this potentially rising to 20% for estates over £2m.

Trusts

If any of the changes come in, it could affect the way trusts are used. The ability to transfer £325k every 7 years into a trust would no longer be possible without an immediate tax charge.

Can I do anything now?

With investments falling in value and capital gains tax currently at 20%, now might be the time to make use of the 7 year rule while it’s around. Or, if you’re concerned about losing control over the assets, using a trust may be your best option.

Rest assured, for every question spinning around in your head, our Private Client team has the answers. So, get in touch.

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