In the months leading up to the Budget, several rumours were circulating about the changes that would be made this year. Chancellor Rishi Sunak announced that inheritance tax and capital gains tax would remain the same, but what does this mean essentially and how does it impact making lifetime gifts and the value of your estate? Vicky Timothy, Partner, explains.
Good News: Inheritance Tax and Reliefs Frozen
The good news is that there have been no changes to any of the reliefs or exemptions for inheritance tax. Agricultural property relief (APR), business property relief (BPR) and even the extremely complicated residence nil rate band (RNRB) introduced in 2015 remain intact.
There has also been no change to the way that gifts are taxed, therefore individuals are free to give as much as they would like away to family members without any immediate tax charge. However, we would always advise you to seek professional advice to go through all your options before making any significant gifts to family members.
Bad News: Tax Free Allowances Frozen
The bad news is that there were no changes to any of the reliefs or exemptions for inheritance tax! The nil rate band – tax-free allowance for inheritance tax – is £325,000 and has been this figure since April 2009, before which it increased steadily each year. It is now set to remain at this level until April 2026 – 17 years during which time, asset values have been steadily increasing.
The RNRB was due to increase from April this year in line with the consumer price index but again this is frozen at £175,000 per individual until 2026. The taper threshold – when an estate starts to lose the benefit of the RNRB – is also frozen at £2m. This threshold includes any assets which qualify for relief, so may catch additional estates. The freezing means that fewer people will benefit from this exemption in the future.
How Can I Maximise the Benefits?
Many headlines refer to the ‘£1m inheritance tax threshold’ for married couples and whilst this isn’t wrong per se, there are a number of traps for the unwary. Now that we know the RNRB is here to stay for the foreseeable future, it might be a good time to start looking at how to maximise this exemption and ensure that your estate passes to your beneficiaries free of inheritance tax as much as possible.
It’s also a good time to think about making gifts to reduce the value of your estate, and perhaps start using your annual exemption for capital gains tax which is also frozen until 2026.
The inheritance tax annual exemption means that transfers made in an individual’s lifetime are exempt from inheritance tax up to a total of £3,000 for each tax year. This figure has been frozen since 1981 but is an easy ‘win’; Larger gifts can be made without any inheritance tax due up front, so it’s definitely worth considering if you are happy that you won’t need assets in the future. The exemption for gifts out of excess income is often underutilised but may also help reduce the value of your estate further. Read more tips on gifting to reduce inheritance tax bill here.
Please contact us if you would like us to provide you with advice about your specific circumstances.