Robert Cartmell explores the impact of the recent Budget on Inheritance Tax and how this will affect Estate Planning for families.
The Inheritance Tax (IHT) implications and why a review of your Estate Planning is sensible at this stage, by Estate Planning expert Robert Cartmell.
I, Robert Cartmell, have worked in estate planning for over 25 years and during this time we have developed a good system for checking with our clients their overall ‘Inheritance Tax exposure’ as part of estate planning matters (Wills and Trust arrangements). We aim to create a working spreadsheet of that position with our clients that can be used as a working source of review and planning.
What is the impact for our clients on the Autumn Budget statement, as far as IHT is concerned?
What are the changes?
1. The Inheritance Tax (IHT) Threshold
The IHT threshold is the level below which there is no IHT payable and above which 40% IHT might be payable on your estate assets. There are reliefs and exemptions, such as assets passing from spouse to spouse are tax exempt.
In the 1990s and early 2000s, the IHT threshold historically rose each year somewhat along the lines of a general ‘inflation’. Still, the IHT threshold was not considered to follow the pattern of house price inflation. It was viewed that as people’s estates grew, the IHT threshold did not marry fully up with that (leading to increased IHT payments). However, from 2009, the IHT rate was frozen. It was due to be reviewed in 2028 (presumably with a view to finally increasing the IHT threshold) but that review has been put back to 2030. So this means that the IHT threshold remains at £325,000 until 2030. That is, of course, subject to any further reviews that Government consider appropriate in future.
It also appears to be the case that the Residence Nil-Rate Band (RNRB) allowance is remaining. That can potentially allow a further £175,000 of IHT relief for families with a property asset, and overall assets of under £2m. That would mean that the overall allowance is £1m between a married couple with children who own assets under £2m.
2. Pensions: a big change
The value of a pension pot is currently outside of the assessment of ‘assets’ for an IHT calculation. For deaths occurring after April 2027, the value is likely to be brought within the assets for IHT. That would make such assets potentially assessed at 40% IHT duty when they are passed down to children (or non-spouses).
3. Business Relief (BR) – reducing the IHT relief available
BR relief on AIM shares (or equivalent shares/stocks) are to attract 50% BR against IHT instead of currently 100%. Many people have been investing in alternative investment market Business shares with a view to helping their overall estate planning (and IHT planning). After owning such assets for 2 years, they are normally exempt from IHT due to the applicability of Business Relief (BR).
Under the Budget, the rate of relief will be 50%. Therefore, a person who holds £500,000 of shares on the AIM market will have their estate potentially subjected to a further 40% on £250,000 which is £100,000 of tax where previously there was no IHT once the 2 year ownership period had been achieved.
4. £1m cap on the value of relief for Agricultural Relief (AR) and Business Property Relief (BR)
Currently, AR might allow IHT relief where land or buildings are used for farming or agricultural use. Certain business holdings held for 2 years also qualified for unrestricted BR. There was no cap on the amount that qualified for the relief but the Budget is going to limit the amount of relief to £1m of such assets.
What is the IHT impact?
In a nutshell, it means that more estates holding assets over £1m between a married couple with children (or over £325,000 for an individual) will pay more IHT that currently. All of the impacts in 1-4 above are penalising estates and families and it will lead to more IHT being generated.
What is my view of Labour’s budget in terms of IHT treatment?
On balance my view is that the IHT updates and changes are ‘fair enough’ for a Labour government to put forward.
I understand the wish of Labour not increase the IHT threshold. We did not expect any increase. However, the threshold has remained at £325k since 2009. IHT a long time ago stopped being a tax on the rich and that number of families and estates that are subject to IHT paying requirements is going to increase even further.
If Government were looking to increase the amount of IHT revenue, I would have still looked at providing an inflationary increase to the nil-rate band £325,000 (up to say £350,000 or higher) but to counter that, would have looked at removing the RNRB (Residence Nil-Rate Band) relief instead. The RNRB is at times cumbersome in its structure and meaning and it is difficult for the lay person to fully understand. So it would be better to do away with it and increase the IHT threshold a little. That would have appeased ‘middle England’ a little bit given the 1-4 potentially very hard hitting changes, as above. It would have also simplified the process and prevented unnecessary and unwarranted time and expense in people having to claim RNRB relief (and HMRC to process and review such applications).
I think the point as to pension pots becoming part of estate of IHT is fair enough. Pensions were not originally intended as IHT prevention schemes – they are there to help people plan for their retirement and those of any surviving widow(er). This will put more pressure on persons with wealth in pensions to utilise those funds (put them to use) which might help put funds into the economic system.
I think the Agriculture Relief (AR) limitation is on the face of it ‘fair enough’ under a Labour government (redistribution of wealth) but I do think it could impact landowners and farming communities in terms of their succession planning and to ensure there are resources available to continue and maintain historical use and continuity.
Next steps for your Estate Planning:
- Conduct a review of your IHT exposure. Let us have a look at this with you as part of a Wills and estate planning review.
- Then take financial advice on whether Business Relief products (such as AIM market shares or other products) are still a good idea for some of your financial portfolio. We still advocate that there is a place for them, but the IHT protection is being reduced (100% to 50% in some cases)
- Do your review as soon as you can. Some estate planning measures take time to put in place. So do so earlier, rather than later.
Consult with us at the earliest opportunity.
Make sure you prepare and plan. That is what we are here to help you with.
Remember to plan, not panic!
Best of luck.
Rob Cartmell