High Court

Labour Budget will ‘deliver a generational shift in wealth’

Rachel Reeves’ Budget measures are likely to deliver an “extraordinary generational shift” in wealth, as the Bank of Mum and Dad start gifting their wealth earlier in order to avoid the amount their children inherit being shrunk by the new Inheritance Tax (IHT) rates.

Russell Kaminski, partner with JMW Solicitors’ Private Client team, said that it is “something of a given” that a person in their twenties is unlikely to ever be as wealthy as the so-called “golden generation” – often referred to as baby boomers. He continued:

“…before them, who would have found it much easier to get on the property ladder and build their wealth through the property market increasing over time.

There is therefore a lot of equity and wealth locked up in that generation (who are now living longer than ever) which means, given the changes announced, that generation may well now gift more during their lifetime to help their children – who simply can’t afford to buy properties – much earlier than they would have otherwise. The outcome of the Budget changes will likely see those baby boomers, who would have simply waited until death for their wealth to pass on to the next generation, reconsider their position and gift wealth earlier.”

Current figures show that fewer than one in 20 estates – just over 4% – pay inheritance tax, meaning the tax is paid on about 27,800 estates a year. Yet economists at the Institute for Fiscal Studies think tank predict that about 7% of estates could be liable for inheritance tax by 2032, external, under current rules. And in July 2023 a YouGov poll for The Times suggested a third thought inheritance tax would need to be paid on their assets when they died.

Reeves announced that relief for IHT will be restricted on Agricultural Property Relief and Business Property Relief: £1m relief maximum at 100% with 50% relief thereafter. This is going to have a big impact on land owners, farmers and entrepreneurial clients, making it urgent for those affected to review their Will and wider structuring. Joe Cobb, Head of JMW’s Private Client team, added:

“Wills need to be carefully structured to maximise the relief – the allowance of £1m is not transferrable between spouses and so clients’ Wills need to cater for this and create tax efficient and flexible structures.

Any clients who have APR or BPR qualifying assets in trust already need to seek legal advice as to what the changes are likely to mean for ongoing taxation of the trusts, and whether any restructuring would be sensible.

Now is the time for anyone holding these types of assets to consider their wider IHT mitigation strategies.”

Reeves also said shares listed on the AIM stock exchange in estates would be taxed at 20% (due to the IHT relief on AIM shares being restricted to 50% as opposed to the current rate of 100% relief). This had been a popular method of IHT mitigation – particularly as it only required the client to survive two years rather seven.

Pensions have also been targeted. There will be a consultation on implementation, but at its most basic level, it would appear that the value in a pension is now going to be part of the taxable estate for IHT purposes. Given that married clients have – at best – £1m of IHT allowances between them to cover all of their assets, this is going to bring many more estates into the scope of IHT. If the pension counts as part of the £2m taper threshold for the Residence Nil Rate Band (RNRB), the availability of the RNRB will be severely curtailed for many estates. Clients should seek advice as to ongoing IHT mitigation – a combination of measures may be possible to limit the impact of this change by having a Will drafted to utilise allowances efficiently and to structure the inheritance of the pension by using a protective trust structure. Joe said:

“The changes in Capital Gains Tax (CGT) were widely expected, but the measures are less aggressive/punitive than anticipated – although they are effective immediately. The Exchequer has probably received lots of CGT from clients who (perhaps unnecessarily) triggered large gains and have only “saved” 4%.”

Also widely anticipated were Domicile changes. For income tax and CGT, a removal of the non-dom regime will be seen as punitive to previously regarded non-doms. Previously “excluded” trust structures will fall within the scope of IHT, and IHT levied on the death of resident but non-dom individuals will now likely to apply to worldwide assets.

Other changes include those to Stamp Duty Land Tax: from 31 October 2024, Higher Rates will rise from 3% to 5% on those buying additional property. And as Labour pledged, the VAT exemption on independent schools has been scrapped.

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