Rachel Reeves’s first Budget could be the most significant in a generation. Since entering office, the Chancellor has been steadfast in her opinion that ‘difficult decisions’ need to be made to balance the books, claiming that the Treasury’s finances are in a much worse state than the Labour Party anticipated.
While very little has been confirmed to date, it is almost certain that both businesses and private individuals will need to revisit, or at least check, their tax and succession planning to ensure that their goals remain achievable and the next generation’s inheritance is protected.
Inheritance Tax (IHT) and Capital Gains Tax (CGT) are the main focus of speculation but pensions, savings and investments could also be impacted.
What Can I Do?
While the Government has remained tight-lipped about possible changes, there are things that can be done now, in advance of the Budget, to make dealing with any significant changes easier.
Take Advice
Engage with trusted advisers who can help you plan for the future.
Many advisers (including Thorntons) will be releasing guidance following the publication of the Budget and these resources should be read and taken advantage of.
Make (Or Review) A Will
Wills which have been written in the expectation of certain IHT reliefs being available may need to be revised if these reliefs are affected in the Budget.
It is important to keep wills up to date and make sure they align with the latest tax landscape and a Solicitor can assist you with this.
Make (Or Review) A Power of Attorney
A Solicitor can also help with putting in place a Power of Attorney (PoA), which allows a trusted individual to manage your financial and personal affairs if you are no longer mentally or physically capable of doing so yourself. A well-drafted PoA can allow Attorneys to continue, or put in place, tax planning measures and keep these under review on an ongoing basis.
While a PoA should not be put in place purely for tax reasons, they are an essential item in the estate planning toolkit.
Implement Any Existing Plans
Families or individuals already engaged in tax planning should try to ensure that any specific tasks (such as asset transfers) are implemented before the Budget is announced.
CGT changes could have a big impact on business succession planning. Currently, reliefs such as Holdover Relief can be used to postpone payment of the tax on the transfer of shares of certain trading businesses thereby deferring (but not avoiding) a potentially significant and upfront CGT bill.
Any significant changes to CGT such as the removal or reduction of Holdover Relief could make it more costly to transfer ownership. If CGT rates were to increase, this would add another layer of expense.
On the IHT side, trading businesses—broadly those engaged in selling products or providing services—will usually qualify for their own special IHT relief known as Business Property Relief (BPR), which can offer up to 100% relief from IHT on qualifying assets.
In a similar vein, farm land and farm buildings which are actively managed and worked will generally also qualify for relief under Agricultural Property Relief (APR); an indispensable relief to working farmers which allows farming businesses to be passed on to the next generation without suffering a large (and potentially unaffordable) IHT bill.
This all means that a successful family business, with proper planning, can transition to the next generation without being subjected to the hefty 40% IHT rate.
However, if the Budget were to restrict the availability of BPR or APR, or (even worse) remove them altogether, the tax burden on families looking to pass their businesses on could increase dramatically, in a worst case scenario leading to the break up and sale of the business to pay the tax. With an IHT rate of 40%, shares in a business worth £1 million could be exposed to a tax charge of £400,000 on the death of the owner.
While it is perhaps unlikely that these valuable, business-friendly reliefs will be abolished altogether, it is not impossible that their application may be restricted or their generosity (up to 100% of the value of the business or the value of the farmland) reduced.
Other relatively recent IHT innovations such as the Transferable Nil Rate Band or the Residence Nil Rate Band, if they were to be restricted or abolished, could also have a major impact on a family’s IHT bill. The Residence Nil Rate Band currently provides an additional £350,000 of IHT-free inheritance to children inheriting the family home, meaning an IHT bill of £140,000 (40% of £350,000) if this allowance were to be withdrawn.
Conclusion
While no one other than the Chancellor and her advisers currently know what changes are on the horizon, business owners and families still have time before 30 October to take action to protect their financial legacy for future generations. Even slight changes to the existing tax framework could have a significant impact and while changes are perhaps unlikely to come into effect on 1 November (although even that is not impossible), taking advice now can make handling any changes that much easier.
