While rumours abound, what guidance can you provide clients now?
News that the government is preparing the ground for IHT and CGT reforms has been circulating for some time. Whilst the introduction of reform is yet to be announced, due to the Budget being delayed and the extent of tax changes required due to the impact of covid-19, the expectation is that once announced, the changes will come in force immediately.
The IHT regime has remained largely unchanged for some 26 years but changes are now very likely. In November 2018 and July 2019, the Office of Tax Simplification (OTS) published two reports on IHT reform, and in January 2020 the All-Party Parliamentary Group (APPG) published ‘Reform of inheritance tax’, indicating that change is on the way.
Currently the IHT regime allows the following main reliefs or tax savings:
Potentially exempt transfers (PETs)
Business Property Relief (BPR)
Agricultural Property Relief (APR)
gifts out of surplus income
capital gains tax uplift relief in the context of IHT
non-domiciled individuals exempt on overseas assets
other minor exemptions and nil rate bands.
It remains to be seen how many of these reliefs will make it through the tax reform.
The OTS made the following recommendations as at July 2019:
reduce the seven year period to five years (this change is likely to benefit the taxpayer)
abolish taper relief
single personal allowance exemption
remove automatic CGT uplift when an IHT relief or exemption applies
technical reforms to business and agricultural reliefs
change how tax is paid on lifetime gifts.
In January 2020 the APPG proposed a much more radical reform, which included the following recommendations:
tax both death and lifetime transfers at flat rate of 10%
annual gifts exemption of £30,000
abolish PETs – all lifetime gifts charged unless within annual exemption
abolish the nil rate band
death allowance at similar level to current NRB
few exemptions – spouse and charity exemptions retained, but no agricultural or business reliefs
abolish the CGT uplift
abolish non-domiciled status for IHT.
Whilst OTS proposals are much more focused and realistic, APPG recommendations lean more towards a wealth transfer tax and could be seen as less likely. However, CGT uplift on death and business/agricultural reliefs feature in both reports, indicating obvious areas for change.
Currently the following main CGT reliefs apply:
rate 10% - 20% for most assets
18% - 28% for residential property
entrepreneurs’ relief (now called Business Asset Disposal Relief)
Principal Private Residence relief (PPR)
gift relief for business assets
gift relief for IHT ‘chargeable transfers’
no CGT on death.
Contrary to IHT, the CGT regime has changed significantly over the years. Rates changed from 30% in 1965-1988, then levelling at income tax rates, with 18% for two years to April 2010, six years at 18/28% or 10% with ER to April 2016, currently at 10% or 10/20% or 18/28%.
Discussions about CGT changes include:
likely change of CGT rate – some point out the rate could return to income tax rates
capping PPR for example up to £1m or similar
restrictions of CGT free treatment of ISAs
restrictions on eligibility for business assets disposal relief (BADR)
CGT uplift on death
a return to some form of taper relief in case of business and investment assets.
It remains to be seen what the extent of changes will be, although with the expectation that some changes are almost certain, practitioners should consider if having a discussion with clients who are considering selling their main residence or passing assets under BPR should take place sooner rather than later.