Tax professionals and commentators were not the only ones causing speculation. The Office of Tax Simplification (OTS), an organisation created by the Government, made recommendations in 2018 and 2019 to reform IHT and in 2020 to review CGT. Rishi Sunak himself asked the OTS to carry out the CGT review in 2020, only a few months before the Budget.
In addition, the all-party parliamentary group produced a report in 2020 which made further recommendations to reform IHT. The consistent theme is that IHT is in desperate need of modernisation due to the current legislation being more than 30 years old. Over the years, successive Chancellors have added layers of complexity. It is of note, however, that Chancellors have always retained the death rate of 40 per cent (unless gifts are made to charity) and since 2009 the IHT-free sum (the ‘nil rate band’) has remained firmly stuck at £325,000 despite inflation and house price increases.
Did the Budget make any changes?
The Chancellor made two rather insignificant announcements at the Budget:
- From 1 January 2022, over 90 per cent of non-taxpaying estates will no longer have to complete IHT forms to obtain probate.
- Physical signatures will not be needed on all IHT returns.
Both announcements have been welcomed but, as they simply affect the administration of probate and IHT, they fail to address the perceived unfairness of IHT and the complicated and arbitrary IHT rules.
Rishi Sunak followed the path of all Chancellors since Alistair Darling in 2009 and froze the IHT-free sum at £325,000 for another five years. This will cause the 40 per cent main rate of IHT to affect more of the population every year.
Despite tremendous hype prior to the Budget, the Chancellor ignored the calls for CGT rates to be aligned with income tax rates. Many consider this to have been the right decision whilst we were in lockdown and before the actual economic impact of the pandemic can be assessed.
The Chancellor also gave further opportunity for entrepreneurs to secure the 10 per cent rate of CGT in specific circumstances on their first £1 million of capital gains. This resulted in sighs of relief metaphorically being heard around the country from investors, business owners, second homeowners and those considering their estate planning options.
Will there be future changes?
While critics have said the Chancellor missed an opportunity to reform IHT and CGT, the reality is that the Treasury receives so little from IHT and CGT that it is hardly surprising both taxes were untouched. The Office of Budget Responsibility’s latest forecast states that in 2019/20 IHT raised £5.3 billion, and CGT raised £9.8 billion. In total this represents a fractional 0.6 per cent of national income.
The Chancellor is in an unenviable position, especially due to the effects of COVID-19 on the economy. If he makes any changes which are perceived to benefit the traditional Tory voter, then he risks alienating those new voters. Conversely, if the Chancellor increases IHT and/or CGT, he risks rebellion and disquiet for the sake of, say, a further 0.2 per cent of national income. It is a political hot potato in trying to strike the right balance, and perhaps it could be argued that the easy option is simply to retain the status quo.
However, there are signs that the Chancellor will make changes to IHT before the next general election. The Government has committed, at least to the OTS, to respond to their 2019 IHT recommendations “in due course”. This is likely to mean plenty more speculation, leaving taxpayers eagerly wishing to estate plan and capture the valuable reliefs of business property relief and agricultural property relief before they potentially disappear or are restricted.
The Chancellor needs to be careful with any CGT changes as many taxpayers choose, and are not forced, to pay CGT. If it is made unattractive for taxpayers to trigger a CGT liability, then some taxpayers may delay selling or gifting assets, or choose not to invest. At a critical time for the country in a post-Brexit and pandemic world, these decisions may have real impacts on the British economy.
Every Chancellor’s priority will be to take steps to balance the country’s books. The real question for Rishi Sunak is whether he is prepared to be bold and to take some difficult decisions to address perceived unfairness and to simplify IHT and CGT.
The information provided in this article is of a general nature and it is not a substitute for specific advice with regard to your own circumstances.
Robert Knight, Consultant Solicitor
T: 020 3319 3700
Illustration by Adam Mallett