Inheritance tax, capital gains tax and the General Election

Both the Conservative and Labour parties have promised not to increase the rates of income tax, corporation tax, National Insurance or VAT. However, there are noticeable silences when it comes to inheritance tax and capital gains tax. So, what are some of the rumours?

Inheritance tax (IHT)

IHT is already at a high rate, 40%, compared to other countries and therefore we think this is unlikely to increase. 

However, there are many reliefs that could be targeted, as a way of generating additional tax revenues. For example:

• Business relief and agricultural relief have long been considered prime targets that either needing updating or complete abolishment.
• The seven-year rule for “potentially exempt transfers” could be replaced with a lifetime giving allowance, similar to what we see in the US.
• The exemption for regular gifts out of income could also be targeted. This exemption allows you to give away unlimited amounts, without a seven-year rule, as long as the gifts are from excess income and not capital.

Capital gains tax (CGT)

CGT rates are currently the lowest they have been for many years. Labour has refused to comment on CGT, provoking speculation that CGT rates could be increased, perhaps reverting to the top slice of income tax rates, meaning CGT could be charged at up to 45%.

Business asset disposal relief (previously entrepreneurs’ relief) is a costly relief allowing a 10% tax rate on the sale of businesses or shares in a personal company. Despite reducing the lifetime limit from £10m to £1m, there’s scope for abolishing this entirely.

CGT deferral relief is currently available when assets are gifted into trust, even if no IHT is due, for example, because those assets are worth less than the 0% nil rate band. Some may perceive this as unfair, and the rules could be changed so that CGT relief is only available if IHT is actually paid.

Wealth taxes

The Green Party has said they will introduce a wealth tax, however, similar taxes have proved unpopular and difficult to manage in other countries, and haven’t realised significant amounts of tax. We therefore think a wealth tax is unlikely.

Is there anything you should do now?

Knee-jerk reactions are best avoided, particularly when information is so limited. The rumours we’ve mentioned above are very much that – rumours! However, there are some options that have been sensible tax planning for a great deal of time, and may well be worth advancing, in case they are removed or limited in the future:

• Make full use of ISA allowances.
• Contribute to a pension and review brought-forward unutilised allowances to see if a top-up is available.
• If you have excess income, consider making regular gifts to benefit from inheritance tax relief.
• Review assets that currently qualify for business relief and agricultural relief and consider long-term exit or succession planning.

Rebecca Jones