The Future of Inheritance tax

Simon Hurren. Private Client Tax Associate Partner answers the question that many of his clients have been asking

As highlighted earlier in this newsletter, Inheritance Tax (IHT) was the source of much speculation before the Autumn statement but in the end, no changes were made.

With the increase in property prices, more Estates are falling within the scope of Inheritance Tax and whilst some measures were taken to rectify this with the introduction of the residential nil rate band 2017 allowing married couples in certain circumstances to pass up to £1 million free of IHT the direct descendants.

Whilst the number of Estates being subject to Inheritance tax is increasing the total IHT receipts represents only 0.7% of all receipts in the UK and is therefore only a small cost to the Government in the overall picture.

Whilst this is the case, the political landscape for IHT is particularly divisive with those who believe that the tax is morally irreprehensible as wealth accumulated has already been subject to Income and Capital Gains Tax during lifetime is then subject to further tax on death. Whilst those on the other side of the fence feel that those who have more should pay more and an abolition of IHT only benefits the already wealthy individuals and does not help those working families who are currently suffering with the cost-of-living  crisis.

Scrapping

One option which was speculated was the complete scrapping of Inheritance Tax. Whilst this measure seems a drastic step, as set out above, the loss of tax is actually relatively small in proportion to the overall tax collected.

Currently to avoid double taxation, assets are rebased for Capital Gains Tax (CGT) purposes on death. This means that where significant capital gains have accrued, they effectively fall away on death on the basis that the assets have formed part of an Estate.

Clearly if Inheritance Tax is scrapped, then the CGT rebasing would inevitably go. This would reduce the loss of tax HMRC would see and whilst from making a headline grabbing change. This may result in a change of attitude to transfer assets during an individual’s lifetime to crystalise any CGT at a lower value where an asset, such as a rental property is surplus to requirements.

Reduced rate

A more measured option, which was speculated, is a cut in the headline rate of Inheritance Tax from 40% to 20%. This is perhaps a middle ground between leaving the current IHT regime untouched or a full scrapping.

It would remain to be seen what would happen with the CGT rebasing cover above but I would suspect this would remain in place as the principle of double taxation would still be there, albeit at a lower rate.

Would a reduction of the headline rate make IHT more palatable to those who suffer it and perhaps reduce the steps individuals take to reduce their liability, only time will  tell.

Other options

As we have seen across all taxes recently, the thresholds and banding have been held firm, with  very little or no increases. This has certainly been the case with the Residential nil rate band being the same since it was introduced in 2017 and the nil rate band remaining the same since 2009.

A simpler option could therefore simply be to increase these thresholds to reflect inflationary increases and to help reduce the increase in Estates being subject to IHT.

Reliefs

Currently, beneficial reliefs are in place called Business Property Relief and Agricultural Property Reliefs.

Business Property Relief applies to unquoted shares in trading companies and is in place to allow the passing of a business form one generation to the next. Without this, it could be necessary to wind up or sell the business and could have a wider implication with the loss of jobs.

Likewise, Agricultural Property Relief is available for farmland at 50% or 100% depending on the terms of any tenancy or whether the owners farm the land themselves. This allows farmland to pass from one generation to another, keeping farming families in business and providing the country with the necessary food production.

Any changes to these could have significant wider economic impact. With shares listed on the AIM stock market benefiting from Business Property Relief investments in such shares can often form part of an individual’s planning for Inheritance Tax. The removal of the relief would inevitably have a significant impact on the AIM stock market and the value of the business listed on it.

Given the wider implications and on the basis that the talk about any changes seem to relate to a reduction in IHT, I cannot see that the Government will touch these reliefs.

With an Election on the horizon, any changes may only be short lived with Labour having previously raised the idea of a Wealth Tax. Any changes to IHT are politically divisive and with the Conservatives reported to be struggling to remain in power, you can’t help but feel there are many other areas of tax that the government could look to reduce, which will have an impact on a wider proportion of the voting population.

Get in touch with Simon or one of the tax team by calling 0330 058 6559 or emailing hello@scruttonbland.co.uk