As Rachel Reeves prepares to deliver her first budget on 30 October, speculation has been rife as to which taxes the Chancellor has in her sights. She has repeated Labour's election pledge that rates of tax for "working people" - Income tax, National Insurance and VAT - will not be raised.
However, she has also been clear that "difficult decisions" (i.e. tax rises) will be made to plug the identified £22 billion overspend within the Treasury's budget.
Increases in Capital Gains (CGT) and Inheritance Tax (IHT) have not been ruled out, nor has reforming tax relief on pensions.
IHT is charged on assets passing on death, as well as certain lifetime transfers. IHT is generally charged at a rate of 40% on the value of an estate, after deduction of allowances and reliefs. The tax-free allowance is currently £325,000 and has been at this level since 2009. An additional £175,000 allowance is available to those leaving the family home to their children or grandchildren. IHT brought in £2.8 billion for the Treasury between April and July of this year, with increasingly higher numbers of estates being caught.
When the owner of a trading business dies their estate may benefit from Business Property Relief (BPR), providing relief on IHT.
BPR applies to qualifying business interests and certain business assets, at a rate of either 100% or 50% provided that assets have been owned for 2 years or more before death. This means businesses and certain business assets can pass to family members free of IHT; or at a reduced rate, allowing businesses to continue to operate following an owner's death without funding a costly IHT bill.
BPR claims resulted in a tax saving of £2.85 billion in the 2021/22 tax year.
Several "think tanks", including the Institute for Fiscal Studies and The Taxing Wealth Report, have pointed to BPR as a relief ripe for reform.
Some commentators have called for BPR to be abolished completely, with the introduction of a deferred payment option to ease the financial burden on estates and businesses to fund an IHT liability arising on death; others have called for the relief to be reformed.
Notably, BPR is a more generous relief than that available to business owners for CGT purposes, where qualification for relief is stricter. One option Ms Reeves may be considering is to align IHT and CGT reliefs, making it harder for businesses to qualify for BPR.
While we do not have a crystal ball, it is clear that tax rises are very much on the cards. It is important to be on the front foot and to anticipate change.
Business owners considering their succession strategies, and who have children or family members involved in the business, might wish to take steps to pass business assets down now. This could involve gifting shares or moving them into trust, to lock in the current favourable BPR exemptions and seek to preserve the value of their business interests for the next generation.
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