How Will The Autumn Budget Affect Estate Planning?
With the Autumn Budget approaching, many are bracing themselves for potential changes in taxation and financial policy, and estate planning is a key area that could see significant updates.
While the UK Government has yet to make official announcements, we can look at current economic pressures, political sentiment, and past trends to predict potential reforms.
This is especially relevant for inheritance tax (IHT) and other estate-related regulations, as they remain contentious issues in the UK’s tax system.
Being proactive about these changes will help you safeguard your estate and ensure your plans remain effective.
Possible Changes to Inheritance Tax (IHT)
Inheritance tax has long been a hot topic in UK politics. With current thresholds set at £325,000 per person (with an additional £175,000 available under the Residence Nil-Rate Band), any assets above this threshold are taxed at 40%.
This means that many families, particularly in areas with high property values, may find themselves paying a substantial tax bill upon death.
Given the current economic climate and increasing government borrowing, there are a few potential directions for change:
1. Abolishing or Lowering the Residence Nil-Rate Ban
There is growing pressure on Shadow Chancellor Rachel Reeves to scrap the £175,000 Residence Nil-Rate Band (RNRB) in the upcoming budget.
Introduced in 2017, the RNRB allows homeowners to shield an additional £175,000 from inheritance tax when passing on their family home to direct descendants, but it costs the Treasury around £2 billion annually.
Critics, such as the Resolution Foundation, argue that the relief is “complex and distortionary,” benefiting wealthier households more significantly.
If the RNRB is abolished, the total inheritance tax threshold for a married couple would drop from £1 million to £650,000, potentially exposing more estates to the 40% tax rate.
For example, a couple with an £800,000 home and £200,000 in other assets could face a £140,000 inheritance tax bill if the relief is removed.
This prospect is particularly concerning for middle-class families who have come to rely on the RNRB to reduce their inheritance tax liability.
In 2021-22, around 25,800 families benefited from the RNRB, collectively saving £2.6 billion on £6.5 billion worth of property.
Rising property prices have already pushed more families into the inheritance tax net, and abolishing or reducing the RNRB would likely exacerbate this trend further.
Although less likely, the government could also consider lowering the RNRB threshold or other allowances, such as the basic nil-rate band.
This would increase the number of estates subject to inheritance tax and raise more revenue in the short term. Either way, a reform of the RNRB could have significant implications for many families across the country.
2. Changes to Business Property Relief (BPR) and Agricultural Property Relief (APR)
Business Property Relief and Agricultural Property Relief have been key tools in estate planning, allowing some business and farm assets to be passed on without incurring a significant tax burden.
There is increasing speculation that these reliefs could be scaled back or adjusted, meaning business owners and farmers could face higher tax liabilities when passing on their estates.
3. Adjustments to Gifting Rules
Currently, individuals can gift up to £3,000 per year without it being subject to IHT. Larger gifts are not taxed if the individual survives for seven years after making the gift.
There could be changes to either the gifting allowance, reducing the amount you can give tax-free annually, or even changes to the seven-year rule, perhaps extending the period during which gifts are liable for tax.
Wealth Tax: A Wild Card?
Another possibility on the horizon is the introduction of a wealth tax, an idea that has been floated in some political circles.
While it remains a controversial topic, the economic fallout from COVID-19 and subsequent inflationary pressures could encourage the government to look at ways to raise revenue from the wealthiest households.
If a wealth tax were introduced, it could either replace or supplement inheritance tax.
Wealth taxes are typically levied annually on the value of an individual’s assets, so this would represent a significant shift in how estates are taxed.
While the likelihood of this is low, it remains a potential issue to watch.
Capital Gains Tax (CGT) on Death
Currently, assets passed on at death benefit from an uplift in their base cost, meaning that the beneficiaries do not have to pay capital gains tax on any increase in value during the deceased’s lifetime.
Some experts have suggested that the government could abolish this uplift, meaning that CGT would be payable on inherited assets based on the original purchase price, in addition to IHT.
Pension Rules and Estate Planning
Pensions are a vital part of many people’s estate planning strategies. Under current rules, pension pots are not subject to IHT if the individual dies before age 75, and withdrawals after this age are taxed at the recipient’s marginal rate of income tax.
There is some speculation that the Chancellor could tighten the rules on pensions, potentially introducing IHT on pension pots, or altering the tax treatment of pensions inherited after age 75.
While this is not a certainty, it is an area to keep an eye on, particularly if you have a significant pension pot that you are planning to pass on.
What Should You Do Now?
Even though the exact changes that will be announced in the Autumn Budget are still unknown, it is a good idea to prepare your estate planning strategy for potential changes. Here are a few key steps to consider:
Review Your Will and Estate Plan
Regularly updating your will and estate planning documents ensures they remain effective and aligned with current rules and your personal wishes.
Consider Lifetime Gifting
If you are concerned about the IHT burden on your estate, you may want to take advantage of current gifting rules while they are still in place. Lifetime gifts can reduce the value of your estate and may escape IHT if you survive the gift by seven years. Always seek professional advice before gifting significant assets.
Make Use of Pensions
Pensions remain one of the most tax-efficient ways to pass on wealth. Review your pension arrangements to ensure they fit within your broader estate planning strategy.
Seek Professional Advice
Estate planning is complex, and potential changes in the Autumn Budget only add to that complexity. Speaking with a professional can help ensure your plan is robust, tax-efficient, and tailored to your specific circumstances.
Conclusion
While the Autumn Budget’s exact impact on estate planning remains to be seen, the current economic pressures and political climate suggest that some form of taxation reform is likely.
By taking proactive steps now, you can protect your estate and be prepared for any changes that may come.
From inheritance tax thresholds to potential changes in gifting rules or even pensions, staying informed and seeking advice will help ensure that your estate planning strategy is both flexible and future-proof.
As we await the budget announcement, keeping an eye on these potential developments and making early adjustments can provide peace of mind and financial security for you and your loved ones.
Why choose ELM?
With potential changes to inheritance tax and estate planning on the horizon, ensuring your estate is well-prepared can feel overwhelming.
At ELM Legal Services, we’re here to guide you through every aspect of estate planning, including Wills, probate, and power of attorney arrangements.
We’ve supported over 30,000 clients across England and Wales, helping them manage their estates, protect assets, and minimise tax liabilities.
Our team provides personalised, expert advice tailored to your unique circumstances.
Whether you’re concerned about potential tax changes or simply want to ensure your loved ones are provided for, we’re here to offer clear guidance and support at every step.
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For more information on probate, Wills, or estate planning, call us at 0117 952 0698 or submit a free, no-obligation enquiry.
