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2020 will serve up a new tax year and possibly a new UK government, depending on the outcome of the 12th December election. Jeremy Corbyn, for instance, has stated earlier this year that a Labour government would change the inheritance tax (IHT) rules to levy a charge on all estates over £125,000.
This represents a £200,000 drop in the current IHT threshold for 2019-20, which stands at £325,000. In many cases, this would lead to a much higher tax bill. For instance, imagine an estate is worth £500,000. Under the current rules, £175,000 would likely face the 40% IHT levy, resulting in a £70,000 tax bill. If the same estate faced Labour’s tax rules, however, then £375,000 would be subject to IHT. At a 40% rate, that could result in a £150,000 tax bill.
The Conservatives do not appear to have made any announcements or manifesto pledges to change the IHT regime. In the wake of gaining a House of Commons majority, it is likely that the current system and planned changes will proceed as previously intended. However, with the election outcome looking uncertain in light of highly volatile polls, it would be unwise to make any firm predictions about what will happen in 2020.
What we can do is offer some different, plausible scenarios which you may want to discuss with your financial adviser or planner. If you would like to speak with our team here at Cedar House, then we invite you to get in touch to arrange a free, no-commitment consultation via:
020 8366 4400 or enquiries@cedarhfs.co.uk
IHT: Current Plans for 2020
To briefly recap the current system, in 2019-20 each person is entitled to an estate worth up to £325,000 which they can pass on, tax-free, to their beneficiaries when they die.
If you are in a civil partnership or married couple, then you can both combine your individual thresholds to potentially pass on more of your estate to children, grandchildren or other loved ones. Each of you is also entitled to a “Residence Nil Rate Band”, which allows you to pass on a further £150,000, tax-free, to direct descendants if the asset in question is your family home.
Theoretically, when you add all of this up, in 2019-20 these rules could allow a civil partnership or married couple to pass on up to £950,000 to their direct descendants.
The important change to note in 2020 is that the Residence Nil Rate Band (RNRB) is currently set to be raised at the start of the new tax year in April. This will increase the RNRB up from £150,000 to £175,000 in 2020-21. From this point, married couples and civil partners would, therefore, be able to potentially pass on up to £1m to their descendants, tax-free.
How the Election Could Change Things
As mentioned above, judging by their current manifesto a Conservative victory at the 12th December election is likely to see these plans continue. Regardless, it will be important to keep in touch with your financial adviser in any case. Sometimes governments introduce policies which were not promised during their election campaign; in which cases it pays to have an experienced adviser watching the situation and offering you their counsel.
A Labour victory, on the other hand, is likely to bring in a set of important IHT changes from 2020 (judging by their manifesto and recent public pronouncements). The RNRB which is set to rise next April would likely be abolished. Their reasoning is that George Osborne’s RNRB reforms mostly favours wealthier families and those on higher salaries. The tax relief is also estimated to cost the Treasury £725m by 2022, so removing it could help a Labour government afford its increased spending pledges.
There is debate as to whether the characterisation of the RNRB as “for the rich” is fair, however. For estates worth over £2m in 2019-20, for every £2 above this amount, the RNRB is tapered by £1. Conservatives are also likely to argue that many ordinary families in the South East would find themselves disproportionately punished by IHT rules without the RNRB, given the higher property prices in these areas.
Other Areas to Watch out for in 2020
There is much going on behind the scenes regarding IHT, both within the civil service and in the policy-forming units of political parties. Many people in power recognise that the current IHT system is needlessly complicated, and needs urgent reform. It is quite possible, therefore, that some changes could come to the IHT system which cannot be predicted at this time. Regular consultation with your financial adviser will, therefore, be crucial to ensure you are not caught off guard and adversely affected by potential changes to the rules.
One possible target of reform could be the current “7 year rule” regarding potentially exempt transfers, which allows you to make a gift free of IHT provided you survive the gift by at least 7 years. Last year, the Office for Tax Simplification (OTS) recommended that this window should be lowered from 7 years to 5. Such a move is possible, but probably unlikely. Not only would it be politically explosive for a future UK government to enact, but it would also probably not raise that much more money for the Treasury.
Final Thoughts
If you would like to discuss your financial plan with a member of our team, then get in touch today to arrange a free consultation: 020 8366 4400 or enquiries@cedarhfs.co.uk.