UK residents’ estates threatened
by proposed new tax banding
The estates of UK residents are set to take a further beating with the introduction of a series of measures including capital gains tax (CGT) on death, a tax banding system and the reduction, in special allowances, if current proposals are adopted.
The Institute for Public Policy Research, which came up with the plan, was tasked with making the inheritance tax (IHT) system fairer. What it has recommended may be fairer, but it is also much harsher. Apart from the addition of the CGT (which is to be set off against the IHT bill), other proposals include reducing the current, generous, agricultural business relief.
The one point in favour of executors is that they should be offered an increase in ‘payment by instalments’ options. However, the core recommendation of the report is the argument that the easiest way to make IHT fairer is to introduce a banding system, similar to income tax, with a basic rate of 22 per cent and higher rates of 40 and 50 per cent. This would mean 87 per cent of estates would pay less, but the new system would still raise an extra 147 million pounds.
However, we estimate that only the first 25,000 pounds of estate, beyond the current nil rate band of 263,000 pounds, would be taxed at 22 per cent. After that, the next 475,000 would be taxed at 40 per cent and the remainder at 50. This is not a very generous reduction in tax for those just in the IHT ‘net’ and, indeed, the overall IHT ‘take’ will increase. Also, if there is a CGT charge on death, many people could be disadvantaged. Individuals with no IHT liability will find their estates being hit by CGT. Currently, assets held in agricultural and business assets are largely exempt from IHT. If these reforms go ahead, then those who have relied on these reliefs will have a higher IHT liability.
Many experts have warned: “Is the report a stalking horse for a government policy to increase the IHT yields, through increases in the rate of tax for many estates coupled with an erosion of some of the current reliefs?” According to a leading UK life assurer, the report reinforces that it is important that people carry out sensible IHT planning. We believe: “The proposed top rate of IHT of 50 per cent on estates over 763,000 pounds could hit many people and would particularly be a blow to those house-buyers who have pushed themselves to move up the property ladder – paying for their mortgage in many cases out of taxed income.
“The Inland Revenue receives a substantial amount of funds from IHT (about 2.5bn pounds in 2003/04), so it is unlikely that they will follow the example of Canada, Australia and, soon, the US in abolishing the tax. The intake from IHT will actually increase dramatically over the next quarter, as we are now in a house-owning generation and we foresee many more people adversely affected by the proposal than predicted. “Well-drafted wills and good tax planning advice will be even more essential for this and future property rich generations.”
Inland Revenue clarifies tax charge on Gift and Loan Trusts
The Inland Revenue has confirmed that loans to trusts do not give rise to a tax charge under the new pre-owned assets tax regime. This draws to a close a recent uncertainty that these arrangements will be caught in the new regime and means consumers can continue to use them for effective tax planning.
Leading IHT tax planners in the Association of British Insurers stated: “This is very good news for consumers and their advisers. We have worked closely with the Revenue to ensure any confusion about this issue is brought to a swift close. We are delighted that this has been achieved and that consumers, who have taken sensible advise about their finances, will continue to benefit.”
Obviously, it would appear that the UK Inland Revenue is to keep the subject on estate taxes high on its agenda. Anyone who is concerned regarding the consequences of this quite punitive taxation of individuals’ wealth would be well advised to seek sensible estate planning advice as soon as possible.
Contributed by
JOHN WESTWOOD
Managing Director,
Blacktower Financial
Management Limited
