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There are currently some interesting rumblings in the UK regarding inheritance tax (IHT). On the 28 January 2020, a cross-party group of MPs proposed reducing the 40% IHT rate down to 10%. The All-Party Parliamentary Group was set up over a year ago following a request by the Chancellor to review the IHT system, and also proposed that almost all tax reliefs (including the “seven-year gifting rule”) be abolished. Instead, the Group proposed that estates valued over the IHT threshold (£325,000 in 2019-20) face a 10% IHT rate, whilst estates worth over £2m would be taxed at 20% upon death.
At the moment, it is unfortunately too early to say whether these changes will be implemented. It would certainly be a radical move for the current Conservative government, which did not make much mention of IHT in its 2019 election manifesto. Certainly, our financial planning team here at WMM in Oxfordshire will keep you updated as things develop. Get in touch to join our mailing list for the latest updates, or request a free consultation if you’d like to discuss your own estate planning needs with a member of our team: 01869 331469.
Important IHT change from the 6th April
To briefly recap how the IHT regime broadly works in the UK, every person in 2019-20 is entitled to an IHT-free estate worth up to £325,000. Since April 2017, moreover, anyone looking to pass their family home to direct descendants (i.e. children and grandchildren) can make use of an extra IHT allowance of £150,000 – known as the Residence Nil Rate Band (RNRB).
As of April 6th 2020, the RNRB will be raised to £175,000. When combined with your £325,000 allowance, therefore, an individual could, in theory, pass up to £500,000 to their direct descendants, tax-free, after their passing. Married couples and civil partners will also be able to combine their allowances, enabling them to potentially pass on up to £1m in 2020-21. However, the rules for RNRB qualification mean many people will not be able to take advantage of it.
It’s a good idea to consider consulting your financial planner about how this and other issues might affect your estate planning. For instance, if you had been intending to try and minimise your IHT bill by moving thousands of pounds out of an ISA into your personal pension fund (which is exempt from IHT), then this might no longer be necessary. The imminent threshold rise in April might also affect your plans for gift-giving under the “seven-year rule”. Again, speak to your adviser to ensure your strategy is fully up-to-date.
An update on pensions tax relief
Many people in Oxfordshire will have likely heard the recent news about Whitehall’s proposals to scrap the 40% tax relief on pension contributions made by Higher Rate taxpayers. Instead, tax relief might well drop to a flat rate of 20% for everybody regardless of their tax bracket. Sajid Javid, the Chancellor rumoured to be considering this change, has now left Number 11 but that does not mean the idea will depart with him.
The Conservative government, moreover, has a large majority in the House of Commons and a potential 5-year term ahead of it, which does leave open the possibility of important near-future reform to the pensions and tax system. Here, we recommend that Oxfordshire residents stay in touch with our financial planning team via our newsletter, to ensure you stay fully-updated about any potential developments in this important area which might affect your financial plan.
Invitation
2020 holds out many questions about the economy and market, with few concrete answers. In these uncertain times, it pays dividends to have professional counsel to ensure you have the information you need to make wise decisions about your long-term financial security and future.
If you are interested in starting a conversation about your financial plan, then we’d love to hear from you. Get in touch today to arrange a free, no-commitment consultation with a member of our friendly team here at WMM.
Reach us via: 01869 331469
