Inheritance Tax, Capital Gains Tax, and Stamp Duty

As we approach the UK government’s upcoming budget, there is a heightened focus on potential tax changes that could impact estate planning, property transactions, and probate. In particular, Inheritance Tax (IHT), Capital Gains Tax (CGT), and Stamp Duty are areas where reform could significantly affect how your assets are managed and passed on to future generations.

Here’s what you might want to consider in light of potential budgetary changes and how it could impact your financial and estate plans.

Stamp Duty

Stamp Duty Land Tax (SDLT) is payable on property transactions, with varying rates depending on the value of the property and whether it is a primary residence or a second home. For clients planning to buy or sell property, or for those whose estate plans involve passing on property to beneficiaries, SDLT can be a key concern.

Possible budget changes

• There may be a review of stamp duty thresholds, particularly as house prices continue to rise. The government could adjust the thresholds, increasing tax burdens on those purchasing property, particularly in London and the South East.
• The current stamp duty holiday on properties up to £250,000 is due to end soon; whether this is extended or reformed is a key question.

Key considerations:

• Property purchases: If you are considering purchasing a property or passing one on to beneficiaries, it may be prudent to complete transactions ahead of any potential SDLT increases in the budget.
• Second homes and additional properties: Be aware of the higher rates of SDLT that apply to second homes and investment properties. These may be impacted by any changes in the budget, making it essential to consider the timing of property acquisitions or disposals.
• Property in your will: If your estate includes property, ensure that your will reflects your wishes accurately and that your beneficiaries are aware of the potential SDLT implications. For example, if they intend to keep a property as a second home, they could face higher SDLT charges on future transactions.

Inheritance Tax (IHT)

Inheritance Tax is currently levied at 40% on estates worth more than £325,000 (the nil-rate band), with an additional residence nil-rate band of £175,000 for passing on a family home to direct descendants.

The inheritance tax relief(s) is doubled assuming the estate has passed to a surviving spouse on first death, potentially creating a £1m IHT threshold. However, with rising house prices and inflation, many estates in the UK are edging towards or exceeding these thresholds, and any changes in the upcoming budget could see more estates subject to IHT.

Possible budget changes:

• The freezing or extension of the nil-rate band could result in more estates paying IHT as asset values increase.
• There’s speculation that the government may tighten rules on exemptions or even lower the nil-rate threshold as part of efforts to raise IHT receipts.

Key considerations:

• Review your estate’s value: Ensure that your estate is not inadvertently caught out by rising property values or other appreciating assets.
• Make use of lifetime gifting: If appropriate, consider gifting assets to beneficiaries during your lifetime. Each individual can gift up to £3,000 per year without the gift being subject to IHT. Larger gifts can become exempt after seven years.
• Setting up trusts to manage how assets are passed on to beneficiaries can mitigate IHT liabilities, though it’s essential to monitor for any tightening of trust regulations in the budget.
• Up-to-date wills: Ensure your will takes full advantage of current tax reliefs and exemptions, such as the spousal exemption and residence nil-rate band, and reflect on any potential changes in the budget that could affect your estate.

Capital Gains Tax (CGT)

Capital Gains Tax applies when you sell or transfer assets, such as property or shares, and make a profit above the annual CGT allowance, currently set at £3,000. While CGT is not applied on assets passed to a spouse or civil partner, it can be a significant consideration when transferring property or assets to other beneficiaries, both during your lifetime and after death.

Possible budget changes

• The government may increase CGT rates to bring them more in line with income tax rates, a move that has been discussed in recent years.
• A reduction in the annual CGT exemption allowance could see more clients liable for tax on asset sales or transfers.

Key considerations:

• Plan asset disposals carefully: If you are considering selling or transferring property or other assets, it may be beneficial to act before the budget in case CGT rates rise or allowances are reduced.
• Hold assets longer: If you expect CGT changes to disadvantage asset disposals, it may be worth delaying any transfers or sales, depending on your broader financial plan.
• Lifetime transfers vs. passing on death: Passing assets to beneficiaries via your will may be more tax-efficient than transferring them during your lifetime if CGT becomes more punitive. However, careful planning is needed to balance this with IHT considerations.
• Trusts and investment strategies: Using trusts or careful investment planning may help mitigate CGT exposure, but these should be reviewed in light of potential budget changes.

How might these changes interact with your will, estate planning and probate?

When planning your will or managing probate after someone’s death, it’s crucial to understand how IHT, CGT, and SDLT work together. The overall aim of estate planning should be to minimise the tax burden on your estate and your beneficiaries.

• IHT and CGT after death: Assets are generally passed to beneficiaries free of CGT at the point of death (this is known as the CGT uplift on death), but they will be subject to IHT if the estate exceeds the nil-rate band. However, beneficiaries may face CGT if they sell inherited assets later, so it’s important to consider both taxes when planning your estate.
• Gifting strategies: Gifting assets during your lifetime may help reduce your estate’s value for IHT purposes, but it could trigger CGT on the asset’s disposal. Careful planning is needed to balance both taxes.
• Property and SDLT: If your estate includes property, beneficiaries may need to consider the SDLT implications if they plan to sell or purchase additional property in the future.

The upcoming budget could bring changes to inheritance tax, capital gains tax, and stamp duty, all of which have a direct impact on how you plan your estate, dispose of assets, and pass on wealth to your loved ones. Contact one of our Private Client Team at Martin Tolhurst to discuss any of the points raised above in more detail.