Responding to Capital Taxes changes
As we approach the end of the tax year, many are considering their options after the significant changes announced in the October 2024 Budget in relation to Inheritance Tax (IHT) and Capital Gains Tax (CGT).
- The immediate increase in CGT to 24% at the higher rate aligns the main CGT rates to those applicable to residential property. Business Asset Disposal Relief (BADR) was protected in the short-term on the first £1 million at 10%. This rate will however increase to 14% and 18% for disposals made on or after 6 April 2025 and 6 April 2026, respectively.
- There has been a 100% IHT relief on qualifying business assets for many years where Business Property Relief (BPR) applies. This will however change from April 2026, for business interests valued at over £1 million, as only 50% of the value will be available for relief, creating an effective rate of IHT of 20% on the excess over £1 million. The reduction in BPR relief will affect many families. More estates will incur tax liabilities and it will become necessary to more frequently formally value businesses as part of wealth planning.
- A beneficiary receives the qualifying business assets at the market value at the date of death, which can be used to offset against any subsequent sale proceeds. To date this has been a ‘tax-free’ uplift to market value but, a potential 20% IHT charge, results in a new tax cost These changes will have a significant impact on many families, and it means that existing plans for intergenerational wealth protection will need to be revisited.
Potential new approaches
Any assets left to a spouse or civil partner do not form part of the deceased’s IHT- chargeable estate. However, the inheriting spouse may not benefit from any BPR that has not been utilised by the deceased. BPR is therefore a ‘use it or lose it’ relief. Rather than all generational transfers being left to the ‘second death’, it may be an idea to consider leaving some business asset value to children on ‘first death’ for a senior couple.
It is currently possible to make lifetime ‘capital’ gifts of 100% business assets where the conditions for Hold-over relief apply. The donor and donee can make a joint election and where the gifted shares are in a qualifying 100% trading company /group, to defer tax on the gain arising. The recipient takes on the donor’s base cost which is usually low. Some wonder whether this generous relief may not be retained long-term. There are many detailed rules and pitfalls and specialist advice should always be taken when deciding whether and how to make such a gift.
We predict that the making of lifetime gifts will become even more important than previously and will be undertaken earlier in donors’ lives. This will include both capital gifts as above as well as more use is made of ‘regular gifts out of income’.
Pension funds have in recent years been a significant tax-free asset to be passed down to beneficiaries, with those that could afford to, financing their retirement by living off capital savings and other investments, rather than their pension ‘pot’. The removal of relief from IHT on ‘unused’ pension funds from April 2027 potentially turns this thinking on its head. Much of the important detail is yet to be decided upon but there will be a cohort who will need to reconsider how to finance their retirement and what this means for other assets they may hold.
We note that the Budget changes are subject to the Finance Bill moving through parliament and becoming law on receiving Royal Assent. We expect this will probably occur in the summer of 2025.
To discuss this, please contact Simon Warne or your usual Crowe contact.
