In advance of the Spring Budget on 3 March 2021, there was considerable speculation that the Chancellor would make changes to and/or increase rates of inheritance tax (IHT) and capital gains tax (CGT). By the afternoon of 3 March, it was clear that the Chancellor would not be making any significant changes to IHT, CGT or the taxation of trusts within the Budget.
How did we reach this point?
Tax professionals and commentators were not the only ones causing speculation. The Office of Tax Simplification (OTS), an organisation created by the Government, made recommendations in 2018 and 2019 to reform IHT and in 2020 to review CGT. Rishi Sunak himself asked the OTS to carry out the CGT review in 2020, only a few months before the Budget.
In addition, the all-party parliamentary group produced a report in 2020 which made further recommendations to reform IHT.
The consistent theme is that IHT is in desperate need of modernisation due to the current legislation being more than 30 years old. Over the years, successive Chancellors have added layers of complexity. It is of note, however, that Chancellors have always retained the death rate of 40 per cent (unless gifts are made to charity) and since 2009 the IHT-free sum (known as the ‘nil rate band’) has remained firmly stuck at £325,000 despite inflation and house price increases.
Did the Budget make any changes?
There were no rate changes and no significant changes to IHT, CGT or the taxation of trusts. Instead, the Chancellor made two rather insignificant announcements at the Budget:
- Firstly, from 1 January 2022, over 90 per cent of non-taxpaying estates will no longer have to complete IHT forms to obtain probate.
- Secondly, physical signatures will not be needed on all IHT returns. Both announcements have been welcomed but, as they simply affect the administration of probate and IHT, they fail to address the perceived unfairness of IHT and the complicated and arbitrary IHT rules.
Rishi Sunak followed the path of all Chancellors since Alistair Darling in 2009 and froze the IHT-free sum at £325,000 for another five years. This will cause the 40 per cent main rate of IHT to affect more of the population every year.
There was tremendous hype about the rates of CGT increasing at the Budget and the Chancellor ignored the calls for CGT rates to be aligned with income tax rates. Many consider this to have been the right decision whilst we were in lockdown and before the actual economic impact of the pandemic can be assessed. The Chancellor also gave further opportunity for entrepreneurs to secure the 10 per cent rate of CGT in specific circumstances on their first £1m of capital gains. This resulted in sighs of relief metaphorically being heard around the country from investors, business owners, second homeowners and those considering their estate planning options.
Will there be future changes?
Post-Budget analysis has focused on the Chancellor missing an opportunity to reform IHT and CGT. The reality is that the Treasury receives so little from IHT and CGT that it is hardly surprising that the Chancellor left IHT and CGT alone. The Office of Budget Responsibility’s latest forecast states that in 2019/20 IHT raised £5.3 billion, and CGT raised £9.8 billion. In total this represents a fractional 0.6 per cent of national income.
The Chancellor is in an unenviable position, especially due to the effects of COVID-19 on the economy. If he makes any changes which are perceived to benefit the traditional Tory voter, then he risks alienating those new voters, especially in the so-called ‘Red Wall’ who chose to vote Conservative for the first time at the 2019 general election. Conversely, if the Chancellor increases IHT and/or CGT, he risks rebellion and disquiet for the sake of, say, a further 0.2% of national income. It is a political hot potato in trying to strike the right balance, and perhaps it could be argued that the easy option is simply to retain the status quo.
The black hole in the country’s finances as a result of the current pandemic will not be filled by IHT and CGT changes, which arguably leaves the Chancellor with a political and moral dilemma rather than an economic one.
However, there are signs that the Chancellor will make changes to IHT before the next general election. The Government has committed, at least to the OTS, to respond to their 2019 IHT recommendations “in due course”. This is likely to mean plenty more speculation between now and the autumn Budget later this year, leaving taxpayers eagerly wishing to estate plan and capture the valuable reliefs of business property relief and agricultural property relief before they potentially disappear or are restricted.
The Government’s response to the consultation on the taxation of trusts suggests that there will be no reform in this area, at least for now. The irony is that probably the most complicated and arbitrary IHT rules affect settlors, trustees and beneficiaries.
Alternatively, perhaps this is recognition that trusts are more often used these days for protection and control rather than tax efficiency. Some sense of certainty in this area should allow those involved with trusts to make plans for the next few years.
The Chancellor needs to be careful with any CGT changes as many taxpayers choose, and are not forced, to pay CGT. If it is made unattractive for taxpayers to trigger a CGT liability, then some taxpayers may delay selling or gifting assets, or choose not to invest. At a critical time for the country in a post-Brexit and pandemic world, these decisions may have real impacts on the British economy.
Every Chancellor’s priority will be to take steps to balance the country’s books. The real question for Rishi Sunak is whether he is prepared to be bold and to take some difficult decisions to address perceived unfairness and to simplify IHT and CGT.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.