With the Budget looming on March 11, the first since the Conservative landslide victory on December 13, radical tax reforms and public spending is on everyone’s minds.
Although, Brexit is a dominant issue, the Telegraph has recently said the Conservative’s main personal finance pledge is a tax cut for “more than 30 million workers” in the form of an increase in the threshold for paying National Insurance. This will save all workers earning more than £12,600 around £100 a year. This is likely to be announced in the Budget.
There is also increasing pressure from the MPs and the general public to reform the widely hated inheritance tax (IHT).
The all-party parliamentary group on inheritance tax and intergenerational fairness is calling for IHT to be cut from 40% to 10%, and 20% for estates worth more than £2m.
The MPs say the changes would make the system fairer and reduce tax avoidance.
However, the MPs also suggested removing tax-free allowances on family homes passed down to children and grandchildren and called for the rule that lets gifts made seven years before death go tax free to be scrapped.
Miles Dean is head of international tax at Andersen Tax says: “A reduction in the rate as planned would of course be welcome, but not at the expense of removing the exemption available for family homes. This is not a desirable proposition.
“The removal of the lifetime PET relief would seem acceptable provided the rate was cut to 10% across the board.”
Ricky Chan, director & chartered financial planner (CFP) at ifs Wealth and Pensions – an IFA firm – told Adviser Points of View last year: “Constant changes in government taxation policy always make it difficult to plan ahead for clients – especially when a new government is in power, they’ll have politically motivated policies/ideas in mind to raise taxes.
Chan adds: “On death, the biggest worry is inheritance tax. For example, those with substantial buy-to-let/investment properties in their estate would need to consider the likely inheritance tax of 40% (above the nil-rate band of £325,000), which would wipe out a lot growth made in the property value during their lifetime.
“Constant changes in government taxation policy always make it difficult to plan ahead for clients – especially when a new government is in power, they’ll have politically motivated policies/ideas in mind to raise taxes.”
“In addition, those with an estate value exceeding £2m, would start to lose the newly introduced “Residence Nil Rate Band”, which is an additional nil-rate band of £175,000 per person from 2020/21 tax year for those leaving their main residences to their children) – there is a tapered withdrawal of £1 for every £2 over this threshold. This means that, they could be unnecessarily paying more inheritance tax, thereby leaving less to their family, by not optimising their estate for inheritance tax purposes.
“This has affected a couple of new clients who were referred to us by accountants, and we have discussed plans in place for them to sell their buy-to-let investments and consider more tax-efficient and hassle-free alternatives.”
Whatever the outcome, IFAs, MPs and the general public will have to wait and see if Chancellor Sajid Javid makes that dramatic move to overhaul the existing IHT thresholds.