Proposed reforms to IHT & CGT: How might the government balance its books in the long term & attempt to recover some of the financial costs of COVID?
Ever since the Chancellor's last Budget, the UK government has continued to develop and evolve its financial support package in response to COVID-19. This, paired with the various stimulus packages aimed at kick-starting the economy post-COVID, has cost the UK government hundreds of billions of pounds. Whilst much of this spending has been necessary, there has been speculation surrounding how the government plans to balance its budget over the long term.
Reforms to the inheritance tax regime have been anticipated for some time and the recent report by the Office of Tax Simplification ('OTS') suggests that capital gains tax is another area which may be targeted in an effort to raise some much-needed revenue.
Inheritance Tax ('IHT')
The All-Party Parliamentary Group for Inheritance Tax and Intergenerational Fairness (the 'APPG') has recently published its proposals for the reformation of IHT, in particular focusing on the abolition of agricultural and business relief.
Currently, agricultural relief allows for qualifying agricultural property to be given away either during lifetime or on death with either a 100% or 50% reduction in IHT. Similarly, business relief provides the same levels of reduction in IHT on gifts of relevant business assets including some shares and partnership interests, land, buildings, and machinery used in the course of business.
The APPG also proposed abolishing the rule by which there is no IHT on lifetime gifts as long as the donor survives for seven years.
The abolition of these reliefs and exemptions would of course increase the IHT burden for some taxpayers. The report also proposes that the current IHT rates of 20% for lifetime transfers to trusts and 40% for transfers on death are replaced with a flat-rate gift tax with a rate of between 10% and 20%.
The proposed system would allow the donor to withhold 10% of any lifetime cash gift to pay the tax. To mitigate the impact on farmers and business owners to some extent, for illiquid gifts of farms and business there would be an option to pay the tax in interest-free instalments over a 10-year period.
Even with the proposed instalment option however, family run farms and other business would be significantly impacted if these proposals are accepted. Farmers and other business owners should keep an eye on developments in this area and perhaps consider making lifetime transfers of relevant assets whilst the relief is still in effect.
Capital Gains Tax ('CGT')
On 11 November 2020, the OTS published their proposals for CGT reform within the UK.
Perhaps the most far-reaching of these is the proposal to increase the top CGT rate from 20% to 45% (for additional rate taxpayers) and to lower the annual allowance, effectively doubling the amount of people who will become liable to pay CGT each year.
The OTS has also recommended removing the capital gains uplift on death. Currently, on death the CGT base cost of an asset is uplifted to market value without any CGT liability, effectively wiping out any capital gain. Removing this uplift will mean that a recipient will be treated as acquiring the relevant asset at the historic base cost of the deceased, with CGT being due on the gain over both periods of ownership when the beneficiary disposes of the asset.
The primary recommendation is that the uplift is only removed in relation to assets that are not subject to inheritance tax (i.e. due to spouse exemption, or agricultural/business relief). However, whilst this may mitigate the impact somewhat, the proposal sparks concerns relating to the practicality of executors having to piece together the cost of the deceased's historic acquisition.
A further reduction in the scope of, or the potential abolition of, business asset disposal relief ('BADR'), previously entrepreneurs' relief, has also been proposed. BADR currently allows for the disposal of relevant business assets to be charged at a lower CGT rate of 10% up to a lifetime limit of £1m. Additionally, it is proposed that Investors' relief is abolished, the reasoning being that there has been little evidence of taxpayers making use of it since its introduction in 2016.
Importantly, these reforms are, at this stage, merely proposals for the government to consider. Whilst it is very likely that the Chancellor will opt to increase taxation in some areas as a means of recouping the costs of COVID-19, it is not yet certain exactly how this will be done.
Nevertheless, those people who would be most affected should these proposals come to fruition, namely business owners, farmers, those considering gifting assets and those with second homes or investments (outside of ISAs or pensions) should keep a close eye on developments in this area and consider seeking legal advice to discuss tax and estate planning measures in good time prior to the next budget scheduled for March 2021.
Originally Published by Wrigleys Solicitors, November 2020
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