The government has already confirmed that inheritance tax (IHT) will change from April 2025, so that it is dependent on a person’s tax residence, rather than on domicile. Once a person has been a UK tax resident for 10 years, they become subject to worldwide IHT, and should they then leave the UK, it will take 10 years to shed this ‘worldwide’ IHT status. This is a significant increase from the current three-year tax ‘tail’.
Wide ranging changes are also expected in relation to trusts. Existing trusts which are not currently within the scope of IHT are subject to new rules being consulted upon. These trusts may become subject to 6% IHT charges every ten years, for so long as the settlor is themselves subject to UK IHT, and may also form part of the settlor’s estate on death, subject to an additional 40% IHT.
There has also been some speculation that changes could be made to the UK’s IHT regime, to increase the tax take. There are a number of possible changes which could be made here:
- An increase in rates – the UK’s IHT rate (currently 40%) is relatively high and there has not been much speculation that this rate will increase.
- Changes to the nil rate band – currently each individual has a nil rate band of £325,000 which means that no IHT is payable on amounts of up to £325,000. Married couples are able to use their deceased spouses unused nil rate band meaning that the nil rate band can mean that a couple can leave assets worth up to £650,000 free of IHT (this is increased to £1m by the residence nil rate band, discussed below). The nil rate band has not increased since 6 April 2009. Freezing the nil rate band has resulted in more taxpayers becoming subject to UK IHT over time. Indeed, conservative commentators have often suggested that the nil rate band should be increased. The government could choose to reduce the nil rate band or do away with it entirely, although it is likely that removing it entirely would be very unpopular. An alternative approach might be to remove the nil rate band for estates over a certain value, in a similar manner to the way in which the income tax personal allowance is removed for high earners. Doing that would ensure that only the richest in society would be affected.
- Removal of the residence nil rate band – the residence nil rate band provides an additional allowance of £175,000 on top of the nil rate band where a person leaves their property to their lineal descendants where their estate is not worth in excess of £2m. Although removal of the residence nil rate band would result in increased IHT revenue, it seems likely that such a change would be deeply unpopular and seen to target only lower value estates since high value estates are not able to benefit from the residence nil rate band.
- Potentially exempt transfers (‘PETs’) – the UK does not charge gift tax and so gifts are free of IHT provided that the donor survives the gift by at least seven years. The government could choose to extend this period to, say, 10 years. There would be some logic in this, since it would align it with the proposed 10-year IHT tail.
- Restriction of Business Property Relief and/or Agricultural Property Relief – there is a clear policy objective behind these reliefs which seek to ensure trading businesses and farms are preserved rather than being sold for parts. Unlisted trading businesses typically benefit from BPR, as do AIM shares. However, the government could seek to restrict these reliefs.
In the context of BPR, this might be achieved by limiting the relief to, say 50%, rather than 100% or removing the application of BPR to AIM shares, though this is likely to have a major impact on all the companies listed on AIM. Alternatively, they might take a lifetime allowance approach, similar to that for Business Asset Disposal Relief, and only allow BPR up to a cap in value – £1m would align it with BADR but this would seem to be very low in the context of operating, private businesses, the long term viability of which could be majorly impacted if the business owners are having to raise 40% of the total value of the business to pay inheritance tax on every generational shift. Clearly such a change would have a substantial and highly damaging impact on entrepreneurs in particular.
IHT – what should I do now?
- Make gifts – Although it is not clear what any changes will look like, clients that are concerned about mitigating their IHT exposure could make gifts before the budget, to set the 7-year clock running for potentially exempt transfers, which would tie in with potential CGT mitigation as well. This could include making gifts of assets which qualify for BPR or APR into trust, which currently benefit from IHT exemption but may not do so in the future.
- Bank nil rate band – Whilst the nil rate band exists in its current form, it may make sense to make gifts of up to £325,000 thereby banking the relief now. Equally if there is a concern around BPR changes, then it may make sense to gift business assets now, either outright or into trust, at a time when we know that they would qualify for relief rather than waiting for any changes.
- Leave the UK – For individuals that have not been UK tax resident for 10 years, one option might be to leave the UK and cease to be UK tax resident. That would ensure that assets which are situated outside of the UK are kept outside of the scope of UK inheritance tax. For those that have been UK tax resident for 10 years or more, the sooner they leave the UK, the sooner they will shed the 10-year IHT tail (though it is currently thought more likely than not that if you leave the UK before 6 April 2025 (i.e. when the new legislation is scheduled to come in) that the 10 year tail will not apply and you will need to be non-resident for at least three tax years to break the IHT connection – no one will know for sure before the Budget) .
- Insure for IHT – whether leaving the UK or not, obtaining life insurance can be provide a low cost and pragmatic solution to dealing with UK IHT exposure.
For further information, please contact:
Christopher Groves, Partner, Withersworldwide
christopher.groves@withersworldwide.com
