Over three months have now passed since 6 April 2023, marking the dawn of the current tax year.
The dust may have settled, yet the outlook can still seem pretty grey for clients considering the headline points:-
- The ordinary nil rate band (NRB) for inheritance tax (IHT) is still frozen, at £325,000. This will remain the case until at least April 2028. The NRB is that part of your estate on which IHT is charged at 0%.
- The annual exempt amount (AEA) for capital gains tax (CGT) has been slashed by more than 50%. This means that for individuals and executors, only £6,000 of any chargeable gains made in 2023-24 will now be exempt from CGT. For trustees, the AEA now sits at just £3,000.
- A further 50% reduction in the AEA will be effected in 2024-2025, meaning that for individuals and executors, it will decrease to just £3,000. Trustees will benefit from an allowance of just £1,500.
- The ambit of business asset disposal relief (formerly Entrepreneurs' Relief) was already curtailed back in March 2020, when the lifetime limit of £10 million was cut to £1 million. This means that gains realised on disposals of qualifying business assets now face CGT at the 'usual' rates to the extent they exceed the £1m lifetime allowance.
So, what for it? Surrender all hope? Pull the duvet a little higher, and hide from reality?
Not just yet. There are silver linings to be found and captured, but tough times almost always necessitate boxing a bit smarter. Here are some starting points to think about.
Use your exemptions
The NRB is not getting any bigger, it's true. It has therefore never been more important to make use of those exemptions that may once have seemed 'small beer'. Doing so effectively will reduce the overall value of your estate which would otherwise 'eat into' your nil rate band on death.
If you're in receipt of significant investment/pension/other income, then it's worth bearing in mind that an immediate exemption from IHT can be claimed on gifts made from 'surplus' net income. 'Surplus' here basically means (post-tax) income which you genuinely don't require to meet your own living costs. It's important to stack up the evidence properly though, so that your executors will be able to substantiate to HMRC that the requirements of the relief are genuinely met, following your death. A sustained enquiry will be rendered less likely if accurate and complete records of all income receipts, expenditure, and gifts made are retained for each tax year in question.
Gifts from capital are immediately exempt if made in accordance with one or more of a number of exemptions. The most common applicable to clients is the annual exemption. This remains at the mark of £3,000 per tax year. To the extent all gifts made by an individual do not exceed this mark, the 'balance' of the exemption can be carried forward for one tax year only. As a minimum then, if you have sufficient capital and are amenable to gifting, you should make a diary entry in early February every other year to the effect that you have two months to 'use or lose' the opportunity to easily divest yourself of up to £6,000.
If you wish to make larger outright gifts to anyone other than a spouse or a charity, the value exceeding the annual exemption will constitute a 'potentially exempt transfer' ('PET') for IHT purposes. This value will be disregarded by HMRC for IHT purposes entirely if you survive for seven years after making the gift. You could look to insure the risk of not surviving for this timeframe (based on the additional IHT that would be payable in that event), if inclined.
Consider trust planning
If the gift you are considering is not of cash, but of any other asset, the chances are that it is going to have a Capital Gains Tax (CGT) consequence. An outright gift of property, for example, will amount to a disposal for CGT purposes.
Where assets are however passed to a trust, holdover relief from CGT can generally be claimed. This means payment of the CGT due can be deferred until the trust (or, in most cases, even the beneficiaries) sell the asset.
If the asset is worth less than your available nil rate band at the point of gift to the trust, then there will be no immediate IHT charge on transfer to the trustees.
Trusts can also assist where the 'donor' party is concerned to protect the ultimate destination of the capital, and/or control and monitor the provision made for certain vulnerable or financially immature beneficiaries. They are therefore an extremely useful tool to consider in the context of estate planning.
Take advice in that estate
It can be difficult to get your bearings and think straight when a loved one dies.
Sound professional advice which accounts for your own tax position and circumstances is however essential before any fundamental decisions are taken in relation to a significant inheritance.
Is administering the estate in line with the strict terms of the will or intestacy going to produce the most tax-efficient result? In a first death scenario, is there a risk the residence nil rate band ('RNRB') may not be available on the second spouse's demise, to mean there is a need to 'capture' the first spouse's entitlement now? Have you considered that the value you are due to receive could inflate your estate, removing its eligibility for key allowances and increasing overall exposure to IHT?
There are means by which you can vary your entitlement to ensure it is ring-fenced and remains outside of your estate, but you may still have access to it if required in future.
The reduced value of the annual exempt amount for CGT now means it is even more important for executors to consider whether capital assets in the estate are likely to rise in value following the death. In such cases, consideration should be given to appropriating these assets to beneficiaries where use of a number of exemptions may more fully absorb the gain at issue. Staggering sales of assets across tax years in the most efficient way should also be contemplated.
Capture key IHT reliefs
Where your estate comprises an interest in a trading business, early consideration of business property relief (BPR) from IHT is key. Work can then be undertaken to consider the structure of the business to secure eligibility for the relief where required, and planning implemented to maximise the benefit of its impact.
Structured lifetime transfers of business assets can be both an effective way to achieve entrepreneurial succession goals in a careful and controlled way, whilst simultaneously achieving long-term tax benefits.
Where will planning is concerned, it is vital to ensure that documents are drawn in a manner which will not 'waste' the relief. Most wills which contain outright transfers between spouses unfortunately have this effect.
Summary
The curtailing of key exemptions coupled with a high rate of inflation undoubtedly means most estates will face greater capital taxation in future.
Careful and timely planning can legitimately mitigate this, and has therefore never been more crucial.
Most gift and trust planning comes with a seven year 'tail'. The order in which you deal with trust and 'outright' transfers must also be thoroughly considered.
The variation of an estate or appointment from a will trust must be tackled within a specific timeframe following death.
'Lifetime' succession planning around value in a business is generally not as effectively addressed where a sale is already on the cards. The wills of those with business interests should seek to maximise application of BPR. Any 'problems' which may impinge upon eligibility for this valuable relief must be considered and resolved in good time, as 'deathbed planning' is simply unlikely to work.
It therefore really is worth investing in sound advice around your planning as soon as you can.
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