We expect the Autumn Budget in late October or early November. It might introduce tax changes that will affect your inheritance when a loved one dies.
Does CGT apply to inherited assets?
One possible change is new Capital Gains Tax (CGT) rules. CGT applies profits on sales of assets, including residential property which is not your main home. It’s currently at 18% on profits from sales above your £3,000 allowance for basic rate tax payers. If you pay higher or additional rate income tax, the CGT rate is 24%. Different rules apply to shares and business assets.
If you sell an inherited property, you will pay CGT on profits above your allowance when compared to the probate value. Capital Gains Tax can push your income into the next tax band for the year. With income tax thresholds frozen more people are moving into the higher tax band and will pay more CGT. Even a basic-rate taxpayer could pay some CGT at both rates.
Changes to CGT
The government has said it won’t increase income tax, National Insurance or VAT. It hasn’t ruled out changes for other taxes such as CGT and inheritance tax (IHT). With revised welfare budget reforms, falling economic growth and government debt increasing, finances are under pressure.
In the 2024 Autumn Budget, the lower rate of CGT for non-residential assets went up from 10% to 18% and the higher rate from 20% to 24%. Rates could increase again for some types of asset. Alternatively, the annual CGT exemption allowance could go down again. In 2022/23 the allowance was £12,300 which went down to £6,000 in 2023/24 and is now £3,000.
Another option is to remove capital gains tax relief when someone dies. This could mean both IHT and CGT apply, amounting to a 54% tax rate. Alternatively current CGT rules could apply to profits above the purchase price of inherited assets rather than their probate value.
Other implications for beneficiaries
From April 2027 your estate is likely to include your retirement pot and death benefits for IHT purposes. Currently, if you can live on other assets, you can pass on your whole pension pot, untouched and tax free. If you die before you’re 75, your beneficiaries won’t even have to pay income tax on their withdrawals.
If the government goes ahead with its plans, you can still leave an IHT-free pension pot to your spouse or civil partner. However, when they die, your children will have to pay tax.
Some experts have suggested that the IHT exemption from income tax should remain for inherited pension pots worth less than £90,000. This would allow dependants to make withdrawals and pay less tax. However, if they weren’t dependants, they would have to take the full value as a lump sum and pay tax.
Other suggestions include IHT at 25% for pension pots above £150,000; 30% if they’re over £200,000 or 35% over £250,000. Each option would raise about £1.3billion in the first year and then £2billion per year.
Uncertainty makes estate planning very difficult, but you might like to review your Will, based on what we currently know. Please give me a call.
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