The lead-up to the recent Budget was peppered with speculation about how the Chancellor might start to recoup some of the expenditure of the last 12 months and more.
This included predictions about fairly significant changes to the Inheritance Tax (IHT) and Capital Gains Tax (CGT) regimes. But these didn’t materialise. Rather, the government announced that the IHT nil-rate band (currently £325,000) and the residence nil-rate band (£175,000) are to stay as they are until 2026. Also frozen until 2026 is the CGT allowance of £12,300.
The nil-rate band is the amount below which no IHT is payable. So, if the value of the assets you pass on to beneficiaries is less than (currently) £325,000, IHT will not apply. If the value is above £325,000, IHT will be charged at 40% of that excess amount.
The residence nil-rate band is a separate tax-free allowance, which can be combined with the nil-rate band to make IHT payable on a smaller portion of your estate. It applies where you pass your property on to a direct descendant – usually a child, grandchild or a step-child.
It’s important to understand the extent of your available allowance (has it been eaten into by gifts made during your lifetime, for example?) and to factor some of your planning around it. Note that, as well as usually being able to pass your estate to a spouse or civil partner without IHT applying at all, you and your partner can pool your nil-rate bands, potentially leaving a bigger tax-free allowance to apply to the surviving partner’s estate.
Capital Gains Tax
When you dispose of an asset that has risen in value, CGT may be payable on that increase. This is subject to a tax-free allowance, currently set at £12,300. Selling, transferring and gifting are all ways of ‘disposing’.
If you are someone who has put firm financial plans in place for the future, this continuation of the status quo may come as a relief. Your existing arrangements may be able to stay in place, without the threat of assets being ‘devalued’ through the application of more onerous tax rules. But we all know that change will come at some point; if not now, then almost certainly in 2026. And we always advise every client to stay on top of arrangements for their financial future and that of their loved ones.
It is so important to build review periods into your planning, whether it’s your Will, your trusts, your assets. Keeping up to speed with changes in the law and in tax rules – and, better still, anticipating future twists and turns – should mean you can structure your estate tax efficiently. Ultimately, we all want to be able to preserve the value in the things we own, and enable those we care about to inherit as much of that value as possible. But that doesn’t just happen; it needs to be carefully mapped out.
And it’s not just changes to tax rules that need to be taken into account. Any significant changes in family life – marriages, births, deaths, divorces, should prompt you to review your planning. Financial changes, too, such as an increase or reduction in assets and asset values should trigger a call to your advisors to ensure you put the best arrangements in place.
Our team is here to help with any queries about your existing arrangements, and to help you put new plans in place.