It is the time of year when the UK waits with bated breath for the Chancellor to delve into his red briefcase and deliver the Budget. For those who do not know the red budget box is not just a bold fashion accessory.
The box was originally commissioned by William Gladstone in 1860 and has been used by every UK Chancellor (except for Gordon Brown and James Callaghan) up until 2011 when it was retired. The briefcase is currently enjoying a quiet retirement on display in the Cabinet War Rooms.
This year’s honour fell to Rishi Sunak who stepped in to deliver his second Budget. There is little doubt that the Chancellor has been enjoying a bumpier ride than his predecessors as the UK economy prepares itself to face the consequences of the coronavirus pandemic. An economic and health crisis that has invaded every UK household.
One factor that is often underappreciated on Budget day is that whilst the chancellor mainly focuses on the taxes of the living, he also has the power to implement changes to inheritance tax. For many months there have been whisperings on the fringes of the private client sector that the Chancellor may do just that. However, the announcement that came yesterday turned out thankfully to not be as extreme as anticipated.
The key takeaways from the Budget and Private Client sector are the changes to the inheritance tax bandings and Capital Gains Tax.
Inheritance Tax
The current Inheritance Tax nil-rate band was frozen and will remain at £325,000 until 2026. Each individual in England and Wales qualifies for this allowance.
The Residence Nil Rate Band which is available to anyone who gifts a property to a direct descendant (children or grandchildren) under the terms of a will was also frozen until 2026 at £175,000. This band was due to rise with inflation in April 2021 but that will now no longer happen.
Any assets that exceed the Bands are taxed at a rate of 40%. The whole of the Residence Nil Rate Band of £175,000 is available as an additional relief provided the key criteria of leaving your home to a direct descendant is satisfied. The only way that a person’s ability to claim the full £175,000 would be affected is if the Estate was subject to tapering provisions. Tapering provisions kick in on all estates that exceed £2 million. In this case the Residence Nil Rate Band will reduce by £1 for every £2 that the estate is worth more than the £2 million taper threshold. It is worth noting that tapering will only apply to a very small proportion of estates.
However, even with both thresholds frozen married couples and civil partners can in some circumstances still benefit from up to £1m pounds of inheritance tax relief.
Capital Gains Tax
Capital Gains Tax (CGT) which is a tax that is paid on the profit a person makes when an asset has increased in value. The amount of CGT that a person pays depends on your income. An approximate summary of the current rates is below:
- Basic rate taxpayers pay 10% on profits and 18% in profits from a second property sale.
- Higher rate taxpayers pay 20% on profits and 28% in profits on a second property sale.
Each individual has a CGT tax free allowance, the allowances are currently set at £12,300 for individuals, personal representatives, and some trusts. The allowance for all other types of trusts is £6,150. These allowances will now be frozen until 2026.
It would appear that for now at least the Chancellor has adopted a semi conservative attitude to Inheritance Tax. However, it is worth mentioning that this guidance is only as good as this current budget and that if he wished the Chancellor could make further alterations to the legislation in future budgets.