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Pre-budget planning – Proceed with caution

Having seen substantial reform to capital gains tax and corporation tax in the past two budgets the majority of the talk in the run up to this year&#39s budget has focused on the potential for income tax reform and in particular (if not exclusively) the possible introduction of a 10% tax band, and how such a cut could be funded. The removal (once and for all) of mortgage interest relief seems to be a possibility.

The one direct tax that has been subject to little or no amendment has been inheritance tax and activity is undoubtedly taking place amongst those with a client base for whom inheritance tax is relevant to encourage a thorough review of the planning possibilities against a background of practical reality.

Apart from any inheritance tax changes that may be prompted by the CTO loss in the Ingram case the potential for &#34root and branch&#34 reform to business property relief, agricultural relief, potentially exempt transfers and 7-year comulation could be significant.

If an individual believes that the current regime is comparatively favourable for making lifetime gifts then now may be as good a time as any to make them provided, of course, that the principle of giving up beneficial access to property is acceptable and also provided the capital gains tax (CGT) implications do not render minimal or non existent the intended inheritance tax benefit.

Of course, for the older donor the potential for CGT &#34wipe out&#34 on death may be a very important factor. After all, why potentially save IHT at 40% if you definitely deny yourself the rebasing of the assets value on death.

Since 100% business property relief (BPR) has been introduced, gifts of business property have been far less prevalent. From a tax standpoint, holding until death seems to make sense securing rebasing for CGT and no IHT. However, if one believes that the threat of BPR limitation is real (although this seems less likely than a tightening up of agricultural property relief) and potentially exempt transfers (PETs) are to be abolished then one can understand the call to action now. It is, however, a bet. What if BPR stays as it is currently? What if PETs are not abolished? Of course gifts should only be contemplated if one is happy with the outcome from a non-tax standpoint. However, another key factor in making the decision is the CGT implication.

We have already mentioned the &#34rebasing&#34 factor that is especially relevant for older donors. However, retirement relief still exists and if all the conditions are fulfilled it applies automatically. This may seem a waste on a gift (say of some business property or shares) especially if a later sale is possible. Even if retirement relief isn`t available there is the operation of hold over relief for a gift of business assets to consider. This can operate to defer any capital gains and may operate to encourage pre-budget gifting.

It is, however, important to note that taper relief will only operate in respect of the new period of ownership by the donee. Importantly, when determining the amount of the held over gain (which will eventually be brought into charge on a subsequent chargeable disposal) no account is taken of any taper relief that might otherwise have been available on the gain had it not have been held over. Currently, this way may not be seen as a point of great significance (taper relief having only recently been introduced) but once taper periods start to become meaningful this limitation may have a very serious impact on planning strategies founded on gifts.


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