With 2020 leaving a big hole in the government's pockets, experts believe there will “inevitably” be changes to the tax regime in the new year.
There are four significant changes in the pipeline for 2021 that may affect high earning individuals, according to accountants Hillier Hopkins.
1. Inheritance tax restrictions on lifetime giving
The potentially exempt transfer (PET) regime, which allows individuals to make gifts of unlimited value to friends and family, is set for review.
Currently, inheritance tax (IHT) 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.
However, a 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,” said Debbie Wilson, a director at Hillier Hopkins who acts for private individuals and their families.
“It would be an easy change to make, facing limited opposition and could quickly be introduced.”
2. Tightening of pension rules
Pension tax relief is an “obvious target,” with the possibility of higher-rate relief on pension contributions being scrapped in favour of a more equitable spread among lower earners, according to the experts.
“This has been rumoured for a few years and could net over £10bn ($13.65bn) in extra tax,” said Wilson.
“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Another rumoured move is to reduce the 25% tax-free amount that can be withdrawn when you access your pension pot, which you can currently do from aged 55 onwards, she added.
“This would likely prove unpopular, but it would leave those who have already retired and taken the lump sums unaffected.
Pension pots can currently be inherited free of tax and are one of the best means for passing on well to the next generation, according to the experts.
Could the rules be changed so that all inherited pension pots become liable to inherence tax, or might 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,” Wilson said.
3. 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, according to Antony Smith, a director in the private client team at Hillier Hopkins.
“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,” he said.
Smith advised: “Landlords and investors should make sure their affairs are fully in order well before the spring budget.”
4. Agricultural Property Relief
Agricultural property relief (APR) is firmly in the government sights, 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.
However, this is likely to change, according to the experts at Hillier Hopkins.
“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,” said Wilson.
“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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