IHT and CGT allowances to rise at a lower rate
The government has announced that two tax-free allowances will rise in line with the Consumer Prices Index rate of inflation, rather than the more generous Retail Prices Index rate.
The inheritance tax (IHT) nil-rate band and the capital gains tax (CGT) allowance have previously risen in line with RPI, which is typically higher than the CPI as it contains extra payments such as council tax and mortgage interest.
This means that in future the tax-free allowances will rise by a smaller amount each year. The announcement follows many similar moves by the government of switching between the inflation measures to save itself some money, such as changing public sector pension increases from RPI to CPI.
The IHT nil-rate band is currently £325,000, meaning that assets up to that amount will not be hit with the 40% tax on death.
The nil-rate band is frozen until April 2015. But in draft legislation unveiled today for next year's Finance Bill, the allowance will rise in line with CPI instead of RPI from the 2015-16 tax year.
The legislation says that the increase in the CPI "from one September to the next [will be] used to calculate the increase in the nil-rate band for the following year".
It adds: "Automatic indexation of the nil-rate band using the CPI will remain subject to override if parliament determines a different amount should apply."
The draft Finance Bill also revealed that while the CGT annual exempt amount (AEA) will remain at £10,600 for the 2012-13 tax year, after that it will rise in line with the CPI instead of the RPI, unless the government overrides it.
"Freezing the AEA forms part of the package of measures to freeze tax and benefits thresholds as part of the government's commitment to tackle the budget deficit," the draft bill said.
"The switch to CPI from RPI from 2013-14 reflects the government's decision to move the underlying indexation assumption for all direct taxes to CPI."
The Treasury says that increasing the CGT allowance at a lower rate could lead to around 60,000 more individual tax returns with a CGT liability being submitted between 2012-13 and 2015-16.
It also reveals that the proportion of men paying CGT will remain relatively stable, with men making up around 60% of CGT payers. "Those aged between 45-50 and 55-60 years are most likely to file a return that includes a capital gain," the Treasury adds.
This article was written for our sister website Money Observer
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).