Much of the first half of 2020 has been spent focusing on the short-term; conversations have predominantly been about consolidation and looking to the future more about contemplating survival than considering additional problems and upcoming challenges.
We are, at the current time, only beginning to understand what the potential long-term consequences of the ongoing coronavirus crisis are likely to be. However, it is absolutely worth highlighting that we are on the verge of entering a recession. And, what’s more, it’s likely to be a crippling one; the economy is struggling more than it has done since World War Two, which means businesses are going to fold, people are going to be out of work, and regulations and laws are likely to change – or be introduced – to ensure that recovery is possible. This will, however, induce hardship in some areas, and one of those will undoubtedly be tax.
If you are currently contemplating how inheritance tax is likely to be impacted, then you’ve come to the right place; we’re here to give you a firm idea of the lay of the land, the potential effects both now and in the future, and what can be done to overcome any hurdles.
So, with that in mind, let us get into it.
An overview of the situation at large
Quite simply, the pressing economic downturn is going to mean assets are not worth as much as they would have been, say, 12 months ago. This will be the case not only with regard to properties but also when it comes to things such as ISAs.
It is, however, not all doom and gloom; the UK’s long history of having ‘structural deficit’ when it comes to the housing market – a situation which has both pros and cons that we will not necessarily need to get into here – means that a fall in average house prices is far less likely to be as detrimental as it will be in other property areas, such as retail or office space.
Inheritance tax planning is something that, without doubt, should remain atop the agendas of people who are likely to, or have recently, become the beneficiary of a residential property. But what exactly should such planning consist of?
Gifting assets has long been regarded as one of the most efficient ways of avoiding hefty inheritance tax bills, and now is by no means an exception; if anything, it could be one of the most attractive routes available. By gifting now, when the market is in the midst of a dip, the recipient is liable to reap long-term rewards once the housing sector recovers in the months and years to come.
It is absolutely worth noting that, should assets be given away, and the giver then does not live beyond seven years from the gifting date, the inheritance tax amount will be calculated based on the value when it was originally ‘presented’ to the recipient.
Since the introduction of the ‘residence nil band rate’, which came into effect in early 2017, the additional allowance in law currently stands at £175,000. What this means, above all else, is that a wedded couple – should they also fill certain criteria which will be made clearer following a conversation with an accountant or tax adviser – could potentially end up having an inheritance tax allowance of £1 million.
It is also worth pointing out – though this is a relatively obvious point – that if the value of an asset continues to fall in the coming years then the amount of inheritance tax payable will also decrease.
The value of communication
Effective communication has always been an integral part of the customer/client relationship, but during this current period of ongoing uncertainty, it is vital. All financial advisers, tax consultants and accountants should be well aware which of their clients falls into – or is at risk of falling into – the category of ‘vulnerable’ and must ensure that communication with these people occurs routinely. Advice and guidance around inheritance tax are going to be critical in the weeks, months and years to come, and communication will be key to ensuring financially exposed people are not left in the lurch throughout the upcoming economic downturn, and to keeping people aware of how to deal with inheritance tax during a recession.
It is likely to be a time of change, upheaval and confusion, and communication is the best way of mitigating these dangers.
What else is there to consider?
It is worth keeping in mind that the coronavirus crisis is going to have far-reaching impacts, especially when it comes to people’s wellbeing. The FCA is very likely to delay releasing any updated inheritance tax guidance in relation to vulnerable people for the time being, largely because of a de facto duty of care. This is a time for looking after people and making decisions only after much contemplation, and coming up with regulations and rules that will protect consumers who may otherwise have been at risk.
For expert guidance and assistance please Contact Fusion Consult. We are a multi-disciplinary business consulting firm with an in-house team of highly-skilled consultants.