Election Proposals – Inheritance Tax & Capital Gains Tax
A review of the main manifesto pledges around inheritance tax and capital gains tax.
As you will also know it is election time again! As advisors on tax matters, we have been focusing on the topics of Inheritance Tax (“IHT”) and Capital Gains Tax (“CGT”) that are being mentioned in the run up to polling day on 12 December. IHT and CGT between them account for only around 10% of total tax received by HMRC per year (and the vast majority of this is represented by CGT). However, even though these capital taxes do not account for a particularly significant percentage of tax receipts, they are nevertheless hot topics politically speaking, for obvious reasons, and elections often produce various proposals for how they should be changed going forwards. This election is no different and, although we are sure that you have all read the manifestos of each of the main parties in detail, we thought it may be helpful to summarise their proposals on the off chance you have not! For the avoidance of doubt, this is not a comment on potential policies, but simply hopefully a helpful summary of the pledges made by the main parties.
Surprisingly, the proposals for changes to IHT have been fairly light. The Brexit Party have the most revolutionary proposal – to scrap it entirely – but The Conservative Party and the Liberal Democrats have made no mention of the tax whatsoever. The only party to address it in detail is The Labour Party, who have stated that they propose to “reverse George Osborne’s Inheritance Tax cut”. The manifesto is not clear on exactly what this entails, but presumably the intention would be to scrap the Residence Nil-Rate Band. This allowance was introduced in 2017, and currently gives individuals who are leaving a property to their children an additional Nil-Rate Band worth (this year) £150,000. Next year the allowance will be increased to £175,000 and, accordingly, under the current rule a married couple will potentially be able to pass £1m free of IHT (standard Nil-Rate Bands of £325,000 x 2 plus Residence Nil-Rate Bands of £175,000 x 2). If our understanding of Labour’s proposals is correct, the total that could be passed free of IHT would therefore be reduced back down to £650,000.
Somewhat surprisingly, the Labour manifesto makes no reference to a gift tax, which they had mooted prior to this campaign. The proposed gift tax was proposed to give each individual a lifetime limit that could be gifted free of IHT to their children, before any subsequent lifetime gifts were immediately taxed. This would represent a marked change to the current position, which allows an unlimited amount sum to be gifted to children (or indeed anyone else) free of IHT as long as the gift is survived by seven years.
Capital Gains Tax
In terms of CGT, again the Conservatives make no mention of any proposals, and they are joined in this approach by the Brexit Party. Both the Liberal Democrats and Labour, however, have pledged to scrap the separate annual exemption of £12,000 and amalgamate it with the income tax personal allowance so that individuals have one exemption to set against both their income and capital gains. The Liberal Democrats have not commented further on CGT, but Labour have also proposed to equalise income tax and CGT rates, so all chargeable gains would be taxed at the individual’s marginal income tax rate. Perhaps most radical of all, however, is Labour’s pledge to scrap Entrepreneur’s relief, which allows for some business gains to be taxed at a lower rate of 10%. The manifesto includes a commitment to replace the relief with a new system, but does not provide details of that replacement system.
Clearly then, we could be in for some major changes to the capital taxes following the election. However, even if the Conservatives secure a majority there are no guarantees that they will not make any changes come the next Budget. There is a long tradition of making major changes to IHT without announcing them beforehand and it may also be worth keeping one eye on the Office for Tax Simplification, which a few months ago published proposals as to how IHT could be amended. This includes reducing the 7 year period for gifts to 5 years and making long overdue changes to various reliefs such a taper relief and Business Property relief. Watch this space and please do feel free to contact our Wills, Trusts and Estates team at any time to take advice on these important tax issues!