The Chancellor’s Budget and Inheritance Tax Planning
The Chancellor’s Budget this spring was highly anticipated for many reasons, with it being the first main budget since the start of the pandemic.
For private client law, the main points to note are that the rates and levels of Inheritance tax and the Residence Nil Rate Band will remain frozen until 2026. From a wider planning perspective, the rates of capital gains tax will also remain frozen, as will the pensions lifetime allowance after it increases in April 2021.
The maintenance of the IHT threshold means that qualifying estates can continue to pass on up to £500,000 (including the main residence) and the qualifying estate of a surviving spouse or civil partner can continue to pass on up to £1 million without an Inheritance Tax liability.
Unlike other allowances, which generally increase in line with inflation, sometimes on an annual basis, the nil rate band for Inheritance tax has been frozen for over 10 years since it was set at £325,000 in April 2009. Whilst the Residence Nil Rate Band has been introduced since, which gives up to an additional £175,000 allowance for those leaving their home to their descendants, this doesn’t take everyone into account and those without direct descendants or those who do not own a qualifying property will continue to feel that this loophole in the law puts them at an unfair disadvantage. As we have seen over the course of the last year, house prices are continuing to increase at a pace, meaning that by 2026, far more estates will fall into the bracket for Inheritance Tax.
On the one hand, there is some relief that the Chancellor has taken the decision to freeze these taxes and not look at the area of inheritance as a place to try and plug the hole in the country’s finances. Yet on the other hand, this is being seen as a missed opportunity to make adjustments to an area of the law that has long been considered too complicated.
For clients, the message is that this area of the law can be very complex and documents, such as Wills, need to be considered on a periodic basis so that current circumstances can be accounted for and adjustments made to allow for Inheritance Tax planning. This is especially the case if you own property and do not have direct descendants, or if you have property and assets approaching or over the IHT thresholds (up to £1,000,000 for a qualifying married couple or qualifying civil partners).
Current opportunities for estate planning will not always be guaranteed, so seeking up to date advice and working through the plans for your estate sooner rather than later will allow time for any changes to take place. This is particularly true if you are considering any changes in ownership of property or the passing on of wealth, which would require a seven year period to pass before becoming free of any IHT liability.
Anyone concerned about their IHT position should speak with a qualified advisor, and take appropriate action while current options are still available.
For further advice or assistance on any aspect of Wills or estate planning, please contact Rebecca on 01457 761320 or email Rebecca@odonnellsolicitors.co.uk.
Rebecca O’Donnell is Head of Private Client at O’Donnell Solicitors.