Labour will unveil its first Autumn Budget for 15 years later this month, with a number of changes likely to be made in order to plug the reported fiscal gaps – raising taxes is the most obvious way in which this will be done.
But while Labour pledged not to raise VAT, Income Tax and National Insurance, there are other options they could look to, including changing the rules relating to Inheritance Tax (IHT) – an intervention that, among others, could significantly impact homeowners and those with property portfolios.
Whilst there is nothing beyond speculation at present that this would be a target of any government plans, Thrings’ Private Client experts Estelle Baldry and Karen Perugini look at what property owners could do to protect themselves from any changes.
What is the current rate of Inheritance Tax?
IHT is currently charged at 40% on assets worth over £325,000, with that threshold increased to £500,000 if passed to direct descendants, subject to satisfying certain criteria. For estates that contain property, it is likely that they will reach this threshold reasonably quickly.
A range of reliefs are also available to reduce the impact of IHT on their property, including taper relief if assets are gifted during lifetime, Business Property Relief and Agricultural Property Relief, depending on what type of property is owned and how it is held.
Gifting property
Property, either in its entirety or in part, can be gifted during your lifetime under current rules which will enable you to reduce or even eliminate the impact of IHT on your estate. This includes:
- The seven-year rule: Gifts that are made whilst alive are exempt from IHT if the person making the gift survives for seven years after making the gift. Known as Potentially Exempt Transfers (PETs), this rule means that if you gift a property to someone else and live for seven more years, the value of the property falls outside of your estate for IHT purposes. However, gifting a property can trigger a Capital Gains Tax (CGT) liability so this would need to be carefully considered before any action is taken. The gift also has to be outright – it is not possible to gift a property and continue to live in it for it to be effective for IHT purposes, unless the person making the gift is going to pay rent to continue living there.
- Annual gift allowances – In addition to larger gifts, individuals are also permitted to give gifts of up to £3,000 per year in total before there is any IHT impact. While modest compared to property values, regular use of this exemption can help to reduce the taxable value of the estate over time.
- Trusts – Setting up a trust can be a great way to pass on property whilst still retaining some control over how it is used. However, creating a trust should not be entered into lightly as they have their own on-going administrative and tax implications, including possible future CGT or IHT charges and so require care and legal support to be administered successfully.
What is next?
Whilst reviewing your estate planning should be done regularly, now is a particularly worthwhile time to do so. Planning ahead can not only ensure you are prepared for all eventualities but will also keep you well ahead of the curve of any changes to property-related tax. By seeking robust legal advice, you can be certain of your current position and how it might be improved upon.
Thrings’ legal experts will be keeping a close eye on the outcomes of the Autumn Budget so check back for reflections on any key announcements by visiting our Insights page.
Thrings’ Private Client lawyers are skilled in offering expert advice to help you confidently plan for your future, whether that is in navigating the rarely straightforward processes that are buying, selling or renting homes or creating flexible but secure succession plans and managing tax liabilities. To find out more about how their open and tailored advice can help you make the right decisions for you and your family, please get in contact.
