2020 has left a big hole in government coffers and there will inevitably be changes to the tax regime this year.
There are four significant changes in the pipeline for 2021 that may catch high earning individuals short.
Inheritance tax restrictions on lifetime giving
The potentially exempt transfer (PET) regime that allows individuals to make gifts of unlimited value to friends and family is set for review, says our Director Debbie Wilson, who acts for private individuals and their families
“Currently, inheritance tax rules allow you to make a gift of any size to friends and family members without incurring any inheritance tax liabilities if you live for a further seven years. Reform has long been suggested, with the Office for Tax Simplification looking at the current regime. We can expect change in 2021, perhaps with an immediate IHT charge on such gifts. It would be an easy change to make, facing limited opposition and could quickly be introduced.”
Tightening of pension rules
Pension tax relief is an obvious target, says Debbie, with the possibility of higher-rate relief on pension contributions being scrapped in favour of a more equitable spread among lower earners.
“This has been rumoured for a few years and could net over £10 billion in extra tax. But as it would increase the tax bills of people earning over £50,000 it would mark a move away from the government’s election promises and that may be a step too far for the Prime Minister.
“Another rumoured move is to reduce the 25% tax-free amount that can be withdrawn when you access your pension pot, which you can currently do from aged 55 onwards. This would likely prove unpopular but would leave those who have already retired and taken the lump sums unaffected.
Pension pots can currently be inherited free of tax and accordingly are one of the best means for passing on well to the next generation, adds Debbie.
“Could the rules be changed so that all inherited pension pots become liable to IHT? Could the government reverse the 2015 legislation change so that it is only spouses that may inherit pensions with favourable income tax rates? It wouldn’t be a surprise if the Chancellor makes some changes.”
HMRC clamp down on landlords and property investors
Landlords have had a tough few years on the tax front and it may become a little harder in 2021, says our Principal Meeten Nathwani.
“We would not be surprised to see HMRC adopting increasingly aggressive measures on residential landlords and property investors who have not returned a capital gain or claimed relief incorrectly. Landlords and investors should make sure their affairs are fully in order well before the Spring Budget.
Agricultural Property Relief
Agricultural Property Relief, APR, is firmly in the government sites, falling under a review of inheritance tax by the Office for Tax Simplification. Currently, the rules allow agricultural land to be passed to family members free from IHT. That, says Debbie, is likely to change.
“APR is a valuable relief for farming and land-based businesses, ensuring, for example, that farms are able to stay in family ownership on death. But there is a belief that the relief is being abused by investors buying land with little or no intention of farming it simply to avoid inheritance tax. We would not be surprised to see changes announced next year.”
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