Adviser Points of View – Inheritance and tax ‘top’ the table of worries for investors says Royal London

IFS Wealth & Pensions director and chartered financial planner (CFP) Ricky Chan says: “Constant changes in government taxation policy always make it difficult to plan ahead for clients – especially when a new government is in power, they’ll have politically motivated policies/ideas in mind to raise taxes.”

Chan says one of the issues regarding changes to capital gains tax (CGT) could be an issue for investors: “One of the proposed changes relate to changing the criteria for “lettings relief” (which could be up to £40,000), so for example “accidental landlords” (e.g. those that have had a change in circumstances such as being relocated to another work location but struggle to sell their homes so temporarily rent out the property) looking to sell a rental property that was once their home would no longer be eligible from April 2020 – hence this could increase the amount of Capital Gains Tax (CGT) payable for them when they finally sell.

“The other key proposed change relates to the “Private Residence Relief (PRR)”, which allows the full period a taxpayer lived in the property as their principal residence plus the final 9 months of occupancy (down from 18 months from April 2020) to be CGT-free.  Again, this could result in higher capital gains tax payable.”

Chan, however says one of the biggest worries for some of his new clients has been the issue of inheritance tax: “Those with substantial buy-to-let/investment properties in their estate would need to consider the likely inheritance tax of 40% (above the nil-rate band of £325,000), which would wipe out a lot growth made in the property value during their lifetime.

“In addition, those with an estate value exceeding £2m, would start to lose the newly introduced “Residence Nil Rate Band”, which is an additional nil-rate band of £175,000 per person from 2020/21 tax year for those leaving their main residences to their children) – there is a tapered withdrawal of £1 for every £2 over this threshold. This means that, they could be unnecessarily paying more inheritance tax, thereby leaving less to their family, by not optimising their estate for inheritance tax purposes.”

Chan says that with some of his new clients he has discussed plans for them “to sell their buy-to-let investments and consider more tax-efficient and hassle-free alternatives.”