Pre-Budget Personal Tax Update - the times they are a changing 

The October budget is right around the corner. It could bring major changes to a whole range of estate planning taxes, especially Inheritance Tax (IHT) and Capital Gains Tax (CGT). Set down are some thoughts, identifying possible changes that might be on the way and how they might impact on your personal wealth and the financial well-being of your family. If you're serious about protecting your wealth, it’s time to brace yourself. Here’s what might change:

Inheritance Tax: changes are widely expected 

The government could be eyeing cuts to IHT reliefs, which may reshape your estate planning strategies. Here’s where the biggest impacts may lie:

• Increasing IHT rates

An easy win for the Chancellor in terms of raising revenue would be to increase the rate of IHT in relation to very substantial estates. A death tax rate of 40% is relatively low. There is no reason why a gradated rate could not be introduced, which imposes softer rates on smaller estates as well as higher rates of tax, up to say 55%, for the largest estates. In the past the highest rate of IHT was 60%, and in relation to Capital Transfer Tax, which was the precursor to IHT, it was 75%. In the press there has been speculation as to the fairest way to tax billionaires. This might be something on the Chancellor’s agenda. 

• Business Property Relief (BPR): 

BPR has been a lifeline for business owners, letting them pass on business assets with significant tax relief. It has been the envy of owner managed business owners in other countries. But many people do not realise that the rate of tax has not always been a maximum of 100%. Various restrictions have been lifted over the course of time, and it is possible that some sort of financial ceiling limits might be imposed where there are substantial BPR holdings. There is a  wealth of difference between the owner of a relatively modest OMB and where someone owns a stake in a major financial enterprise. Hence there are growing concerns that the government may reduce this benefit, potentially leading to higher tax bills for their heirs.

• Agricultural Property Relief (APR): could farmers get taxed more? 

APR offers tax breaks on agricultural assets, but this relief might also face cutbacks. For farmers and landowners, this could result in steeper IHT liabilities. It is well known that some oppose the purchase of farms by wealthy investors, who secure valuable IHT reliefs leaving others to farm the land for them whilst living in substantial mansions. This could well be an area where changes may be introduced. One possibility would be to a put a financial cap on the maximum relief available in relation to a farmhouse. 

• Nil Rate Band and Residence Nil Rate Band: are limits changing? 

Again, there has been widely trailed criticism of residence nil rate band relief. This can be worth as much as £140,000 in money terms where husband and wife are concerned. A left wing think tank has urged the Chancellor to scrap the availability of the relief to raise £2bn. In practice, she might be tempted to reduce the level of relief on the basis that the current level disproportionately favours those in the South of the UK as compared to the North. 

Capital Gains Tax: what’s on the line?

CGT could see significant changes too, which might affect anyone looking to sell assets or investments. Here’s what to be aware of:

• CGT rate hikes: sell now or risk higher rates

There’s speculation about a potential CGT rate hike. This could mean higher taxes on property or investment sales. The difference between the maximum rate of tax on income and capital profits is very marked. You might need to act fast if you were planning a sale to lock in the current rates. From the Chancellor’s point of view, the fallacy in aligning tax rates to a 45% maximum has an inherent fallacy. Individuals may simply decide to retain their investments, such as development land, until such time as the rates come down. Also, proprietors of owner managed businesses might be deterred from selling. The Chancellor will have to take into account the knock on effect of any tax increases as it might put a brake on future economic activity. It’s a potentially difficult tightrope for the Chancellor to walk, as raising taxes might deter future growth. 

• CGT reliefs: will entrepreneurs lose out? 

Key reliefs like Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) and Investors’ Relief could be scaled back, increasing the tax burden on business owners and investors when selling assets. In practice it is probably too late to consider starting transactions to save CGT this close to the Budget. It is simply a factor for proprietors of OMBs to consider, unless they are actively considering making gifts to family members in any event and can afford to pay the CGT due on the disposal albeit at 10%. 

• Anti-Avoidance Crackdowns: be aware of possible anti forestalling

It is important to take into account the possibility that the Government may announce new rules designed to limit the tax saving opportunities that would arise by making disposals in advance of the expected tax increases in the Budget. This suggests that only disposals should be made which are prudent in terms of their size and nature. There is also a long term factor that needs to be taken into account, in that the number of anti-avoidance rules are more likely to increase than reduce in light of the Government’s drive for increased tax revenue.

Post-Budget: a brave new world?

The upcoming budget could bring significant changes to estates and businesses. It is going to be important to take stock of both the opportunities as well as the challenges that new rules will introduce:  

     1. Revise your business and estate plans

It is going to be important to take stock of the position in the light of any changes. It is not a process that should be rushed. The current tax system is very complex and it will take time to work through any changes that are introduced. 

     2. Reassess your business exit strategy

Potential adjustments to Business Asset Disposal Relief could impact your exit plans. The alignment of income tax and CGT rates might introduce some additional nuances and revise tax planning strategies that have fallen by the wayside in recent years.

     3. Tailored guidance for business owners

Our team specialises in supporting OMBs, offering personalised advice to help you adapt to new rules and safeguard your financial future.

Key takeaway

Budget changes could affect your business and estate planning. We're here to provide expert advice, ensuring your assets are protected and your strategies remain tax-efficient.