Budget  

Tax freezes will be a tax rise over time

This article is part of
Guide to the Budget

While the Chancellor did follow the Conservative Party’s manifesto promise not to increase the rates of income tax, national insurance, pension tax relief and inheritance tax, the surprise inclusion in this “freeze” was capital gains tax, which many thought would be subject to large scale reform.

CGT

The annual exemption amount for Capital Gains Tax will remain unchanged at its current level (£12,300) until April 2026.

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Mainstream investors investing in stocks and shares and Oeics will not really be impacted by this as they will manage their disposals to ensure their gains stay within the limit.   

The main impact is likely to be those who cannot phase their disposal, for example business owners and property investors. These people will see an increase in tax as more of their gain will be subject to tax as the tax free amount has not risen.

Richard Taylor, senior wealth planner at Sanlam, says: "Personal investor clients have [breathed] a sigh of relief. The fact there had been a consultation and the rumour mill was that potentially people would get clobbered with a [CGT increase], the fact that has remained unchained, most people see that as a bonus.

"But then conversely you have your business clients who, with the increase in corporation tax, will probably see that and think [it's another thing hitting them, when they have already had it quite difficult]."

Inheritance tax

The Chancellor announced that both the nil rate band and residence nil rate will remain at existing levels until April 2026. 

The nil-rate band (NRB) will continue at £325,000, while the residence nil-rate band will remain at £175,000. 

This means a single person maximising the nil rate bands can pass on up to £500,000 with no inheritance tax liability while a married couple or those in a civil partnership can pass on up to £1m without an inheritance tax liability.

The NRB has remained at £325k for an individual since the 2009/10 tax year.  The residence NRB and the main nil rate band were due to increase by CPI from 2021/22 but this will now not happen. 

The amount of IHT paid and estates paying IHT has been increasing since the nil rate band was frozen and this continued freezing will see that trend continue. 

Cameron says: “How will this raise tax? Quite simply with the amount of estate you can have tax-free frozen, this means people with an existing IHT liability will see that grow as their estate grows. Some people’s estates will not grow and take them over the tax free amount and into the IHT net.”

While the chancellor expects to raise an additional £1bn from these measures, Cameron says that certain actions can be taken to avoid having to pay an IHT charge: 

  • Spend the money
  • Make outright gifts to individuals or trusts
  • Invest in tax wrappers which are outside the IHT “net” e.g. pensions
  • Invest in assets which attract relief e.g. Business Relief
  • Insure the tax liability

And as has always been the case, one of the best IHT planning tools available is a suitability drafted Will to ensure that full benefit is made of any NRB and RNRB available.