The Chancellor’s Autumn Statement in many ways contained no great surprises from an estate planning point of view but they are worthy of note and consideration.
When considering estate planning and how to pass on wealth to the next generations in the most tax-efficient manner, Inheritance Tax (IHT) and Capital Gains Tax (CGT) are the main taxes to be considered.
Inheritance Tax (IHT)
Whilst individuals are able to pass on the first £325,000 of their estates (the nil rate band) to the next generation free of IHT, there is also a further allowance of up to £175,000 per person referred to as the “residence nil rate band”. However, the residence nil rate band is subject to various conditions.
A married couple or a couple in a civil partnership therefore have an allowance of up to £1 million that they can potentially pass on provided that they fulfil all the conditions.
The thresholds for these nil rate bands and residence nil rate bands have been frozen for some years at £325,000 and £175,000 respectively. The Government had previously announced that these would remain frozen at those levels until April 2026 but in the Autumn Statement extended that freeze to April 2028.
Therefore, it is increasingly important that as the real value of these allowances are eroded by inflation, that couples and individuals make sure that they make full use of them in the way that they structure their Wills.
In particular where one or both of a married couple have been widowed before, they potentially have additional nil rate bands and residence nil rate bands available to them and Wills need to be carefully structured to ensure that full advantage is taken of them.
Therefore, a review of Wills is recommended to ensure that they do make full use of the nil rate bands and residence nil rate bands that are available.
Capital Gains Tax (CGT)
When considering making lifetime gifts to the next generation, if the gift is of an asset such as a property or shares, or if a property or shares are disposed of to fund the gift, then CGT may be payable.
The Government has announced that with effect from April 2023, that the annual CGT allowance for individuals will be reduced from £12,300 to £6,000 per person. In other words, only £6,000 of gains will be permitted before CGT becomes payable at 20% or 28% depending upon the tax rate applicable to the individual.
Thereafter, the annual allowance will be reduced to £3,000 per person from 6 April 2024.
We recommend therefore that clients consider carefully their position with regard to capital gains and make full use of the current allowance available for the remainder of the current tax year whilst it is still available to use.
The annual exempt amount for trusts is usually half that applicable to individuals. Therefore, the current allowance of £6,150 will be reduced to £3,000 in April 2023 and £1,500 in April 2024.
The CGT allowance for trusts is already limited and therefore, trustees are urged to carefully consider whether there are any disposals they should make during the current tax year to make full use of the limited allowances that are available to them before those allowances are restricted further.
Estate planning for the future
If you are considering passing assets to the next generation as an IHT planning exercise, or if you are a trustee and require further advice, our Private Client team based in Truro and Exeter would be pleased to assist.