IHT and CGT allowances to rise with lower CPI rate

Inheritance and capital gains tax-free allowances will rise more slowly in future, following a government decision to uncouple them from the retail prices index (RPI) so they rise in line with the lower consumer prices index (CPI).

The legislation has been introduced as part of the final version of the Finance Bill 2012, and reflects the government's intention to move the underlying indexation for direct taxes from RPI to CPI.

The IHT nil rate band (NRB) will remain frozen at its current level of £325,000 up to and including 2014-15. It will then rise in line with CPI from 6 April 2015, rounded up the nearest £1,000, unless parliament determines a different amount should apply.

For CGT, the annual exemption amount will remain at £10,600 for the 2012-13 tax year, and will then rise in line with CPI.

Latest figures available from the Office for National Statistics showed CPI annual inflation stood at 5% in October. RPI for the month was 5.4%.

Notes in the Finance Bill indicate the government expects increasing the IHT nil-rate threshold at a lower rate could lead to around 1,500 estates requiring completion of the full IHT400 form instead of the shortened IHT205 in 2015-16.

Of these, it is expected that 900 more estates will have inheritance tax to pay and this number will increase over time. The reform is expected to increase tax receipts for the government by approximately £20m in 2015-16.