Michael Lansdell explains the implications of the capital gains tax annual exemption and the inheritance tax nil rate band being frozen in this year's budget.
In his budget, the chancellor announced that the capital gains tax (CGT) annual exempt amount (AEA) will remain frozen at its current rate, up to and including the 2025/26 tax year. This decision was taken hand in hand with the freezing of the personal allowance and basic rate income tax bands.
AEA is the annual amount below which capital gains realised by an individual in a particular tax year are not subject to CGT. The AEA for individuals in the 2020/21 tax year is £12,300 and will remain so until April 5, 2026.
And in practise?
The implications will be less wide-reaching than CGT tax rate increases. Freezing the AEA could be seen as a ‘stealth’ increase in CGT; however, it is likely to impact a smaller number of taxpayers than the corresponding freezing of income tax thresholds.
The inheritance tax nil rate band (NRB) and the residence nil-rate band (RNRB) will remain at their current level up to and including the 2025/26 tax year. The NRB threshold, above which inheritance tax (IHT) becomes payable, will remain at £325k until April 2026 (it has been set at this since 2009). The RNRB, which applies when taxpayers pass their main residence to their direct descendants upon death, will be kept at £175k for this period. This is reduced by £1 for every £2 that an estate exceeds £2m in value, and this threshold will remain fixed until 2026.
The combined effect of the NRB and RNRB means that some estates worth up to £1m can be passed on, without any IHT, on the death of a surviving spouse or civil partner.
The decision to maintain the NRB and RNRB at current levels could see more estates exceeding these thresholds if asset values continue to rise. This would result in them becoming liable to IHT or no longer qualifying for the RNRB. The RNRB was introduced in April 2017 and, though it offers relief from IHT for smaller estates, it is complicated.
Broader changes to the inheritance tax system may still be on the cards, so why not get tax-planning guidance and support from Figurit, so you have all the options in front of you, should this happen. Careful preparation will give you choices and freedom to make good decisions, to maximise your personal and business finance.
For more information call Figurit (formerly known as Lansdell & Rose) on 020 7376 933.