A new government: family wealth and Inheritance Tax (IHT)

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An area of concern for many is the protection of their family’s wealth, whether that is from claims within the family - perhaps from creditors or on a divorce - or from ‘Britain’s most hated tax’ – Inheritance Tax (IHT). Many clients seek solutions that will ensure the wealth they have worked hard to create is not lost either outside the family or to the Government on death.

During the recent election campaign it has been mooted as an area where change is likely to occur. The Labour Party has committed to not increase Income Tax, National Insurance and VAT, which is welcomed for many families, but this lack of clarity on IHT is also a worry to many when planning for future generations. 

IHT only affects a very small number of estates, but for many farmers and business owners the reason they are not affected is because of the reliefs that are available to exempt their businesses on death.  This allows the business to pass to the next generation without any tax burden, so their family can continue the business, debt free.

However, a number of consultations over the past few years have looked at IHT reform, including restricting existing business and agricultural reliefs to just £500,000, which would be a devastating blow to businesses across the country. 

Will the new government restrict existing business and agricultural reliefs for IHT?

The question is whether the new Government would introduce such a change, and my feeling is that it would be a step too far.  What is perhaps more likely is that the tax-free uplift – which keeps parents in the business until their death so their share of the business is up lifted to market value, allowing their children to then sell, paying no IHT on death and no CGT on the disposal - is more likely to be scrapped.

For individual’s and business owners there is no easy answer as to what action they should take, but with a budget likely in the Autumn, they and their advisors will need to be ready to act if there are any major changes.

Individuals with non-business assets, especially investments and cash, that is subject to IHT should consider what assets they want to retain and then look to either their investment strategy, making use of IHT friendly investments, or passing their assets either directly to their children, or into a trust (see our article on strategies to help reduce your inheritance tax liability for more information).

Alternative Investment Market (AIM) shares

Investments can provide protection from IHT and Alternative Investment Market (AIM) shares, have been heavily used in the past. However, the 100% relief from IHT for these shares is another area that may come under scrutiny as the Government looks at where it can collect further tax revenues. 

Trusts

Trusts have been around for centuries, and whilst many see them as the preserve of the wealthy only, this is not the case.  Trusts in their most straight forward form, allow individuals to transfer assets into a structure they can continue to control, albeit not benefit from, taking those assets out of their estate (subject to the 7 year rule ) adding a layer of protection from claims on divorce or from creditors.  Whilst trusts may appear complex, if you are concerned about protecting your assets you should speak to an advisor about how they can help you and your family plan for not just the next generation but future generations as well.

Navigating change

As the new Labour Government takes charge, individuals must adapt to potential changes in policies and taxes that will inevitably follow a change in Government. If asset protection and transfer of wealth are your key priority it is important to consider how any future changes could impact your plans.