In the months leading up to March 2020, there were many whisperings about whether this would be the Budget that delivered reform to the inheritance tax (IHT) system.

Instead, the focus of the Budget has been on mitigating the economic impact of COVID-19, increasing spending on innovation and infrastructure, and no tax increases across the general population.

Changes to inheritance tax and pensions relief appear to have been shelved for the moment by the new Chancellor. However, does that mean there are no important changes to IHT which should be heeded in 2020? In this short guide, we discuss some of the key areas where your estate planning may be affected in the coming months.

2020-21, IHT & Property Exemption

The Budget admittedly contained no mention of simplifying the IHT system, lowering the IHT rate from 40% to 10%, scrapping business property relief (BPR) or removing lifetime gift allowances. However, one important update to IHT which has been long-anticipated (and not impeded by this Budget) is the scheduled increase of the IHT-free property threshold.

In 2019-20, each person is entitled to pass £325,000 to their beneficiaries upon their death, free from the standard 40% IHT rate. Moreover, you can raise this threshold by an extra £150,000 if you pass your family home on to your direct descendants. This residence nil rate band (RNRB) was introduced by George Osborne in 2015, and the threshold has gradually risen with each new tax year. 2020-21 represents the final year it is set to be raised (by £25,000), which could enable each person to pass on a total of £500,000 to direct descendants, tax-free.

Married couples and civil partners have long been able to combine their IHT allowances, and the new Budget has not stood in the way of this. From 2020-21, therefore, such couples could theoretically pass a £1m combined estate to their children and/or grandchildren. For those in the south of England where rising property prices have pushed many middle-class people into the IHT firing line, this is likely to be particularly welcome news.

AIM Shares & IHT

In the summer of 2019, the Office of Tax Simplification (OTS) published a second report on the UK’s inheritance tax system. One area which came under the spotlight is business property relief (BPR), which is relatively costly to maintain at about £1bn per year. Whilst the report did not call for the abolition of the relief, it did raise questions about its consistency with the UK’s wider tax regime and highlighted its distortive, complex nature.

Whilst BPR was originally set up to help avoid the break-up of family businesses, it has also come to play an important role in IHT planning by allowing people to invest in small companies on the Alternative Investment Market (AIM). In simple terms, if an investor holds unlisted investments or AIM shares for at least two years and up until their death, then the BPR rules allow them to avoid IHT on these shares.

The 2019 OTS report, however, recommended a withdrawal of the treatment of shares listed on AIM as unquoted securities for BPR purposes. As the March Budget approached, therefore, there was some speculation (and concern) that the Chancellor might scrap the AIM qualification for IHT relief. However, fortunately for AIM investors and for those leveraging them to help with IHT mitigation, the Budget avoided any reform to this aspect of the tax system.

Entrepreneurs’ Relief

For business owners, however, there is one aspect of the March Budget which may affect your financial plan, and possibly your future plan for your estate. Costing the UK Government about £2.4bn per year, Entrepreneurs’ Relief was set up in 2008 to incentivise people to build up a business. When the business was eventually sold, up to £10m of gains could be taxed at a flat rate of 10% rather than a 20% higher rate capital gains tax (CGT). For some people, the future sale of their business can be an important part of their retirement plan, so any change to this relief is likely to impact the proceeds they could be due.

In this month’s Budget, however, the Government has taken the decision to slash Entrepreneurs’ Relief by 90%, to just £100,000 in maximum tax savings. This appears to have happened for at least two reasons: to reduce financial pressure on the treasury, and because the relief does not appear to have encouraged enough people to start their own businesses. Regardless, please discuss this important area with your financial adviser, if you think this change could affect your financial plan or future IHT mitigation plan.

Estates over £2m

Only a month or so ago, Prime Minister Boris Johnson and then-Chancellor Sajid Javid were floating the idea of introducing a “Mansion Tax”. This would levy an annual 1% tax on residential properties worth over £2m (including one/two bedroom flats in London), in the hope of netting an extra £1.7bn per year for the exchequer. Such a measure would have likely affected many people’s total estate value, and consequently also their IHT strategy.

The March Budget made no mention of this idea, which appears to have been put aside for now after facing angry responses from party supporters. However, one policy development which might affect your financial plan concerns a new 2% stamp duty surcharge on non-UK residents buying property in England or Northern Ireland. Whilst the measure appears to be targeted at overseas buyers, it also seems to encompass British citizens living abroad who have been classed as non-resident. For those with this residency status, or who might gain this designation in the future after retiring abroad, make sure you consider professional financial advice about the implications of this surcharge for your estate and finances. 

Posted by Peter Selby

Topics: Insights & Advice, IHT

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