Anticipating the impact of Rishi Sunak’s summer statement on UK wealth

This week’s summer statement from Chancellor of the Exchequer, Rishi Sunak, looked to address the financial position the country finds itself in due to the coronavirus pandemic, which has brought sharply into focus the divides in the country particularly around wealth. 

The support packages being implemented seek to address getting the nation back up and running, and plugging the gaps that have started to emerge in employment and the impact on household affordability and spending. However the question of how the UK is going to pay for these measures in the long term remains.

Here at Ascot Lloyd, our Tax and Trust Specialist, Gill Philpott, takes a look at what’s been happening and the likely impact on tax and consideration in estate planning.

What are the implications on the nation’s wealth and how may future taxation play its part?

Gill PhilpottBy Gill Philpott, Tax and Trust Specialist, Ascot Lloyd

Before the coronavirus pandemic there were already moves to review and consider a wealth tax in the UK, and the pandemic has brought the need to raise taxes very much to the fore.

This has been the subject of review over the last few years but is now gathering momentum. Increasing tax take from income tax, capital gains tax, stamp taxes seems a less likely option. The need to address the country’s debt and support infrastructure and those disadvantaged by unemployment and working in the industries most affected by the pandemic have seen an appetite for consideration of wealth redistribution.

Tax reforms and simplification

In January, the All-Party Parliamentary Group (APPG) published a report on the Reform of inheritance tax (IHT). This was hot on the heels of the reports from the Office of Tax Simplification (OTS) recommending a number of changes to the tax.

The APPG report took on board the OTS’s simplification recommendations and went further. A key recommendation would see more far reaching changes to IHT and taxation of wealth.

Then on the 2 July, just before the summer statement, the Institute for Fiscal Studies (IFS) launched a project to explore the topic ‘Is it time for a UK Wealth Tax?’

Currently the debate is in early stages and no detailed information is available, but it is likely we will see a move to a final report in December. 

What might we expect?

While a wealth tax and its form may be a little way off yet, reform or simplification of inheritance tax may be closer. Last summer the Office of Tax Simplification, (independent of government) tasked with reviewing the administration and application of inheritance tax published its second report.

IHT is perceived as an unfair and complex tax. At the wealthier end of the spectrum, the overall rate of IHT suffered is lower than at the midpoint estate value as at the wealthier end reliefs and exemptions can be utilised to their fullest extent.  

It is anticipated that changes would start in countering the wealth divide and be a relatively easy way to change an existing tax.

The report from the APPG was wider reaching than the OTS’s recommendations, essentially recommending a lower rate of IHT but with fewer reliefs available. It proposed the spouse exemption and nil rate band stay, but Agricultural Property Relief (APR) and Business Property Relief (BPR) be removed.  The reliefs and exemptions for lifetime gifting  would be replaced by a single large annual exemption of £30,000, and if exceeded  a lifetime tax at 10% would apply. Currently only a lifetime charge applies at 20% if the gift is to a trust and the nil rate band is exceeded. The proposals would gather more lifetime gift IHT. The report also recommends reporting all gifts over £10,000.

The principles drive a political debate

Wealth can help to provide education, health and security. For those that cannot afford these benefits, a tax to distribute wealth from those that can to support the nation in providing for those that can’t, has been a political discussion for centuries. We could never have anticipated that it would be brought so sharply into increased focus by a pandemic and the unequal impact of the Covid-19.

Of course, wealth tax could be said to already exist with the current income tax, capital gains tax and inheritance tax regimes. However more could be done to address wealth inequality. These existing taxes are paid from income generated or when assets change hands. A wealth tax would be levied on ownership. 

The wealthiest individuals are most able to take advantage of IHT reliefs and exemptions and pay a proportionately lower rate of tax. As the OTS pointed out in its first report, the average rate of tax increases from under 5% for estates with a net value under £1 million, up to 20% for estates valued at £6-7 million, after which it falls to 10% for estates with a value of £10 million or more.

This does not take account of lifetime giving, which probably increases the distortion still further, as people whose main asset is the family home cannot easily give it away during their lifetime. As estates increase in value, they have proportionately more securities and assets that do qualify for reliefs such as business property relief. These assets not only qualify for 100% exemption, but are also easier to give away free of tax during someone’s lifetime.

Keeping on top of things

While IHT rules have not changed significantly for over 35 years, keeping your estate planning under review is important. Having the support of a financial adviser in times of potentially significant change in the coming years will help you to understand how these changes could impact your plans and your wealth.

Tax is only one component of a financial plan. There is a fine balance between managing tax exposure and ensuring you have enough income to enjoy life and have security in later life. There may also be aspects of controlling how and when your beneficiaries benefit.  

Inheritance tax is paid on death. How much is paid will depend on the value of the estate and who inherits. It can cost loved ones thousands of pounds but with careful planning and by understanding inheritance tax thresholds, you can avoid leaving behind an unnecessarily large bill. 

How much inheritance tax will I have to pay?

When someone dies their estate can be subject to inheritance tax, which is currently charged at a rate of 40% on the estate value over certain allowances and exemptions. 

Everyone has a nil rate inheritance tax allowance, and for the 2020/21 tax year this is set at £325,000. There is also a residence nil rate band, which is £175,000 for the 2020/21 tax year. This band is available to use against the value of your home if inherited by children and grandchildren etc. However, it can be restricted. Inheritance tax planning can help you make the best use of these inheritance tax free bands.

The inheritance tax due on your wealth is based on the value of your estate at death. This will be the value of your worldwide assets which includes, but is not limited to, your home, investments, such as ISAs, premium bonds, banks accounts, general investment accounts etc, life assurance policies and personal belongings such as jewellery, cars, furniture. Years of sustained house price inflation means that more estates fall into the inheritance tax net.

A gift to a family member or friend

If you have enough to support yourself through your life and would like to see others enjoy the benefit of your wealth in your lifetime, making gifts are a straightforward way to do this and can provide tax saving benefits. 

There are currently a number of inheritance tax exemptions available for lifetime gifting. If you wish to make larger gifts this can really make a difference. While to fully feel the beneficial effects of gifting you would need to survive for seven years, for some an immediate inheritance tax saving can be achieved if your estate is over £2 million.  

Pensions as part of IHT planning

Part of the IHT planning process would be to consider all your potential sources of income and wealth, including pension arrangements. Pension funds are generally free of IHT on your death. So using assets that would form part of your estate to meet your retirement needs can help to reduce its value  and thus leave more wealth to pass to your beneficiaries.

The key to IHT saving is to plan early. Everyone’s circumstances are different so there is no one size fits all solution.

Why working with an independent financial adviser is so valuable

The good news is that there are a range of mitigation techniques available to address potential liabilities, and these can be easily incorporated into the financial arrangements of any individual whose estate is likely to exceed the available thresholds. Taking a long term view to inheritance tax planning is essential to ensure you maximise the benefits of the exemptions.

Our independent financial advisers can help to find the right solutions for you, looking at and planning with all your assets, pensions, property and financial investments. They will help you to understand and make decisions on how much income and wealth you may need at different stages in your life, responding to your concerns on how much you need in later life and looking at scenario testing to provide reassurance on the viability of your plans. They will work with you to calculate how much you can afford to give away. They can use specialist cashflow modelling tools to help you understand how you can achieve your goals and mitigate your tax exposure, so you and your loved ones get to enjoy as much of your wealth as possible.

What does the future hold?

While the government’s support packages have been welcomed, it’s expected that the rates of unemployment will continue to climb. When unemployment rises so does their required financial support, and in tandem, the UK’s levels of debt. A wealth tax review is firmly on the table, and aims to provide a means to distribute wealth to help build public finances to provide public services, repay national debt and support those in society not able to support themselves.

While the possible changes to tax on wealth will lead to a period of uncertainty, a point to consider is that tax changes are not often detrimentally retrospective, so planning now with known current rules could mean inheritance tax savings may be gained rather than lost. Taking good financial advice makes sound financial sense.