UK Autumn Statement 2022 – Ralstan Review
The UK Autumn Statement 2022
Due to the chaos of the previous Prime Minister and so called Trussonomics, everyone was eager to see what is in store for us from the UK Autumn Statement on 17th November 2022.
According to the Financial Times, Jeremy Hunt was planning a raid on Inheritance Tax (IHT) in this year’s Autumn Statement in an attempt to raise about £54bn through tax rises and cuts to fill the black hole within the UK public finances. Instead, he has decided to reduce some allowances and extend the freeze on IHT allowances.
The Effect of Fiscal Drag:
It looks like the Conservative’s favourite film seems to be Frozen. I was wondering if Olaf was going to make an appearance in the House of Commons to help Jeremy Hunt spread his frosty joy with Fiscal Drag!
Fiscal Drag is an economic term whereby inflation or income growth, moves taxpayers into higher tax brackets.
With inflation running at 11% and interest rates on the rise, this was never going to be a ‘chilled’ Budget. It seems Mr Hunt has opted for a combination of both tax increases and spending cuts to plug the hole in the public finances.
The Big Freeze
Back in 2021, Rishi Sunak announced that various tax rates and allowances would be frozen until April 2026, to help pay for the furlough from the Covid Lockdown. Jeremy Hunt confirmed in the budget, that the freeze will be extended until at least April 2028. The difference is that back in 2021, inflation was running at about 2%. This Big Freeze is therefore likely to be more painful, for longer and bring more estates into these frozen thresholds and allowances.
Statistics show us that the Nil Rate Band – the first threshold at which an estate will start paying IHT was set at £325,000 in 2009 and has not changed since and previously stated will not change until at least April 2028. This represents a freeze of nearly 20 years, which has never been adjusted for inflation. It has been expressed by the Financial Times, that the Nil Rate Band should now be £450,000 in real terms.
According to Government inheritance tax statistics, IHT receipts received by HMRC during the financial year 2021-2022 were £6.1 billion. This was an increase of 14% (£729 million) on the previous financial year and is the largest single-year rise since 2015-2016. No wonder the Conservatives have a thing for Elsa!
Capital Gains Tax:
It is not just the frozen IHT allowances which clients need to consider from the UK Autumn Statement, but the Inflationary gains on assets will become taxable to Capital Gains Tax (CGT), especially as the Budget announced cuts to the Annual Exemption. From 6th April 2023, the exemption will be reduced from £12,300 to £6,000. It will then be halved to £3,000 from 6th April 2024. Therefore, if clients are looking to sell assets or gift assets directly to children, they may wish to consider actioning those gifts before April 2023 to benefit from higher allowances.
Although the personal allowances have been reduced, one bit of good news that has come out of the Autumn Statement was that there were no changes to CGT rates themselves, despite rumoured increases.
There were also no changes to Business Asset Disposal Relief (BADR), which remains at 10% on up to £1 million of qualifying business asset disposals during a person’s lifetime. With rising income tax burdens, there is now a greater incentive for business owners to structure their returns as capital rather than income. For example, some could be more incentivised to sell their businesses at low CGT rates whilst they are still available and if time permits.
Freezing Opportunities for Clients:
Estate planners and professional advisers should be looking at ways of getting clients to spread asset ownership across family members. Subsequently, bringing back into focus of the idea of intergenerational estate planning.
Trusts can act as a useful freezer to remove assets from a client’s estate after 7 years and allow future growth of those assets to build up outside of the client’s estate, and potentially even outside of the estates of the beneficiaries. Thus, creating true legacy and succession planning.
Clients should also be reviewing those assets that could have significant growth potential such as a piece of land that could have future development potential, or a rental property with re-development potential.
Depending upon the client’s circumstances, they may wish to transfer the asset into Trust at the current low value, in the hope that in the future, the asset will grow in value due to re-development. Therefore, the growth of that asset is outside of the estate of the client for IHT purposes, freezing the growth exposure for the original settlor of the asset. This is what we call Freezer Trust planning.
The Freezer Trust:
In Summary:
One of the key questions that seems to get overlooked when dealing with clients at the enquiry stage is what is the historic gain situation on assets, i.e. ‘what is the original purchase price of the asset?’.
As a reminder, outright gifts of investment assets will trigger a gain upon transfer. For example, an investment property that a parent would like to gift to their child with latent gains would crystallise the gain (dry gain) upon transfer. The CGT would have to be paid on this gift within 60 days. However, clients can consider utilising Holdover Relief on the transfer of assets into trust, thereby deferring the capital gain until an eventual sale of the property.
Although the UK Autumn Statement has done some tinkering around the edges, the main theme of freezing allowances and fiscal drag will bring more taxpayers into higher tax brackets over the next 6 years.
Please do get in touch with us if you need assistance with your client’s circumstances or would like more information.
CONTACT US:
The Ralstan Group prides itself on being a ‘go to’ resource for clients and their advisers.
Consequently, if you have any questions, please give Andy a call on 0161 282 0444. Alternatively, email us today on enquiries@theralstangroup.co.uk.
Click here To read our article on Planning for the Asset Rich Baby Boomer Generation.
