No doubt many people applauded Chancellor George Osborne’s proposal in July 2015 to increase the inheritance tax threshold to £1million for those who own their home. Certainly that would be a welcome development for many UK families. Of course nearly every piece of good news comes with some that is not so good, and that’s the case with this proposal as well.
Changes won’t benefit everyone, and benefits won’t take effect immediately
Some observers contend that the proposed new inheritance tax laws are overly complex. For example Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants (ACCA), wrote that the new law is one of the most “over-engineered tax proposals” he had ever seen, and that it needs radical simplification. As well, he noted that it contains several flaws.
One major flaw is that the tax allowance for family homes will not be available to childless couples and only benefits “direct descendants.” Granted, within its limitations the legislation provides considerable latitude for defining direct descendants. Included are children, grandchildren, stepchildren (as well as their children) and even foster children. Since the majority of Britons have children either by birth or adoption or fostering, most of the population will be covered. Even those who wish to downsize will be covered, meaning that one can carry the allowance from the point at which the family home is sold, and then use its value against one’s estate at death.
However, there is currently no recognition for the childless couple or the single man or woman who has no children. Many would argue that these people deserve the same breaks as everyone else should they wish to pass their estate on to someone of whom they have become fond, such as a relative’s or friend’s child, a godchild, or someone who cared for them in their final years. All in all, the proposed change is still too geared towards the traditional norm of marriage and having children, not taking into account the many other lifestyle options that exist today.
Another flaw in the new inheritance tax legislation is that it will not take effect until after April 2017, so it’s “bad luck to your heirs if you die before then”, as Mr. Roy-Chowdhury observed. His suggestion, mirroring the position of the Association of Chartered Certified Accountants, is that family homes should simply be exempt from inheritance tax as they currently are from capital gains tax. And this brings us to that “forgotten” tax which can, if you’re not careful, strip away your family’s wealth.
A hidden menace?
The capital gains tax is a frequently overlooked levy, and in fact Chancellor Osborne hardly mentioned it at all in his emergency Budget in July 2015. Yet it is a major source of revenue: HM Revenue & Customs raises more money from the capital gains tax than from inheritance tax, having collected £3.9billion from the former in 2013-14 and £3.4billion from the latter.
If you’re not careful you could end up forking over a hefty 28 percent of your capital gains to the tax collector. There are numerous hidden dangers of which you should be aware. If, for instance, you have shares or investment funds outside of a pension plan or tax-free Individual Savings Account (ISA), you could very well be liable on your gains when you sell. Should you sell expensive items such as jewellery, paintings or antiques for £6,000 or more, you could also be faced with a significant tax demand. And if you are amongst the increasing number of British citizens owning buy-to-let properties or second homes you could be blindsided by a huge tax bill.
Those who sell several assets in the same tax year face the most risk, as all of the gains are added together, very possibly putting you in a higher tax bracket. As it stands now everybody can make profits of £11,100 in the current tax year before paying capital gains tax (for couples the cap is at £22,200). Even so, large capital gains can still result in a severe tax burden.
With every new law or regulation there are generally “winners” and “losers” and the newest rounds of legislation and proposed legislation are no exception. But winners and losers alike will probably agree with the assertion that tax laws are complex. Laws are also subject to change, so you owe it to yourself – and your heirs – to keep abreast of these changes. If you want to gain a solid basic understanding of capital gains there are numerous credible resources to get you started. And naturally you should never make any important financial decision without first consulting a properly qualified expert.
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