There had been rumours of changes to the death benefits on pensions or restricting the ability to claim business relief on AIM shares, but these have escaped unscathed for the moment.
From the start of the new tax year next month, the tax-free allowance for inheritance tax will be frozen until 2028 at £325,000, a figure which has remained the same since 2009. There is no limit on what you can leave tax-free to your spouse.
The frozen inheritance tax threshold is a brutal example of fiscal drag stretching over a decade!
Restriction of Reliefs
While there were no headline changes to inheritance tax announced by Jeremy Hunt last week, there were a series of smaller more peripheral changes that taxpayers still need to note.
Agricultural property relief, and charity relief are both being scaled back in scope as a consequence of Brexit. For instance, if you own agriculture property in Europe you will no longer be able to claim agricultural property relief for inheritance tax.
Similarly, if you were donating to an EU or EEA (European Economic Area) charity in your will, you would expect relief from inheritance tax on death. This relief has also been scaled back to ensure that UK taxpayers are only able to get inheritance tax relief if they support UK charities. If you want to support an EU charity, you’re not going to get inheritance tax break in return.
While these changes are small in the scheme of things, people may need to change their arrangements to take them into account.
The abolition of the ‘Lifetime Allowance’ is not directly relevant to inheritance tax but it could act as an incentive for people to save more into their pension plans and increase the amount of wealth that passes outside the inheritance tax regime.
At the moment, pensions can be passed tax-free in their entirety to the next generation if an individual dies before the age of 75. Pensions can still be passed on after that point without inheritance tax, but the receiver will be taxed on the proceeds at their marginal rate of tax.
It can be a question of working out if the marginal rate an individual faces will be greater than the 40 per cent standard rate of inheritance tax, meaning advice should be taken.
Pensions are not generally subject to inheritance tax when you die but there is an income tax regime that sets out to ensure a tax take. We might see more people encouraged to use pensions as an inheritance tax saving mechanism rather than as a provision for retirement. It was already a top recommendation if circumstances warranted along with the regular gifts out of income exemption; making lifetime gifts out of capital and surviving seven years; and ensuring capture of the spouse relief on the first death and business property relief where it is available. It all requires time to be on your side and proper planning to be thought through and executed.
We will have to see whether there are any changes to the taxation of death benefits and any changes to how pensions are treated for inheritance tax.
What is certain is that the tax will continue to be a big money generator for the Treasury, with the Office for Budget Responsibility predicting that receipts will grow over the next four to five years by nearly £3 billion more than expected.