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Election update - private client tax implications

View profile for Tim Ogle
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Election update - private client tax implications

So, the first Winter election since 1974 and the first to take place in December since 1923, has returned a Conservative Government. But few would have expected a majority of 80, thanks to the Tories winning so many seats in the traditional Labour heartlands across north England and Wales.

From a Private Client tax point of view, I think we can now expect a continuation of what is in train already, subject to, of course, and as seemingly always, the Brexit near paralysis of Government. 

Following an announcement in the November 17 Budget, the Office of Tax Simplification (OTS) has already reviewed and reported on how to improve the “customer journey” when executors and administrators report and pay Inheritance Tax (“IHT”).  The OTS has also reported on how to simplify the design of the tax.

The OTS makes 11 recommendations in this respect, focusing on three main areas as follows:

  1. Lifetime gifts, including liability for paying any tax due on such gifts
  2. Interaction with capital gains tax
  3. Businesses and farms

It will be interesting to see which recommendations are taken forward, particularly since the Institute of Fiscal Studies has said that the government will (and the Labour party would have had to, had they won the election) need to raise taxes to fund its manifesto commitments. For the Tories, having promised not to raise income tax, NIC and VAT, they will have to raise it somewhere to deliver on their manifesto pledges.

I think we need to keep an eye particularly on the following:

  • The new higher rate of SDLT charges an additional 3% tax on second properties.  Applying from April 2016, it was forecast to raise £1 billion in tax revenue in its first year, but actually raised £2 billion. Accordingly, as an easy tax raising measure, it is likely to stay.
  • The Residence Nil Rate Band gives an estate an additional £175,000 of nil rate band (on 6 April 2020) where the deceased passes on an interest in a residential property to a “lineal descendant”, such as a child or grandchild. For a married couple, this can mean a total IHT free allowance of £1 million between them. It is a very complicated relief but one that is likely to stay.
  • One IHT exemption considered to be under threat is the normal expenditure out of income exemption. Currently, we can all give away any surplus income as part of our normal expenditure, without limit, and without it coming back into our estate for IHT purposes if we die within seven years, provided that we are left with sufficient income to maintain our normal standard of living in the meantime.

So, for example, the monthly premium on a policy for the benefit of another. Or perhaps the commitment to pay one’s work bonus to a third party. In the case of City workers, such a “transfer on value” may be substantial which is why this exemption is under threat, on the basis of being too generous.

Thus, anyone thinking about using this exemption as part of their estate tax planning might be well advised to get on with it; any future legislation will not likely be retrospective to challenge those expenditure commitments already underway. It might also be that the current annual exemption of £3,000 each year per donor will increase also, as part of a quick quid-pro-quo, but this will likely not offset the loss of the normal expenditure exemption for those who use it.

Watch this space!

I am a solicitor in the Wills, Trusts & Probate team and can be contacted on 01245 453840 or tim.ogle@birkettlong.co.uk.

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