As was predicted by many commentators, Capital Gains and Inheritance Tax were very much in the chancellor’s sights in today’s budget. Although the taxes do not raise a large amount of money in the greater scheme of things, they do affect a lot of people.
The changes to Capital Gain Tax were the first to be announced, and it is a process of alignment which is being used as a vehicle for producing a larger take of tax revenue. Capital Gains Tax on investment sales is from tonight to increase from 10% to 18% for lower rate tax payers, and 20% to 24% for higher rate tax payers. This means that the same rate will apply to investment sales and residential property sales (other than principal private residences, which will remain exempt).
There have been a number of changes in relation to Inheritance Tax, but the expected increase in the 40% rate did not materialise. Nor did the reduction in the £325,000 Nil Rate Band or £125,000 Residential Property Relief allowance where a house is passed on to issue after death. Also, in relation to the Nil Rate Band it was announced that it would remain fixed at £325,000 until 2030 rather than the previous date of 2028. This is disappointing as the Income Tax tax free allowance was announced to increase with inflation form 2028/29.
Perhaps the biggest tax hit for people’s estates, and therefore their beneficiaries, is going to come from the inclusion of people’s pensions as an asset in their estate. This is often a significant sum of money as we have all been encouraged to invest for our old age over the last few years. It is expected that the inclusion of pensions will push many more estates into the taxable regime, and perhaps discourage such a focus on pension investment or an increase in people withdrawing money from pensions where possible.
For those in farming or other types of business, the biggest shock was that an agricultural and non-agricultural business will now be charged to Inheritance Tax at death at the rate of 20% on any value such a business has over £1,000,000. The old full relief existed in order to prevent people inheriting businesses having to raise potentially large amounts of money at a very difficult time, with the resultant risk that businesses running on a tight margin may not survive the tax bill. A lot more thought may now need to go into how businesses and farms are structured and owned to help mitigate the potentially serious risk to their survival should an owner pass away.
Another attack on businesses through the Inheritance Tax regime came from the halving to 20% of the Inheritance Tax relief available on any Alternative Investment Market shares owned by someone when they die. Such shares used to benefit from 100% relief in order to encourage people to invest in start-ups and more entrepreneurial businesses to allow them to build a stronger economy in the future, but the importance of such investment seems to have diminished in the government’s eyes with the need to raise tax to spend today.