January 30, 2024
Article
There has been a huge amount of speculation in the press regarding the future of inheritance tax (IHT) under a new government, whether Conservative or Labour. The Conservatives wishing to appeal to their voters with speculation they may remove IHT all together and the Labour party who would like to tackle the avoidance of IHT.
Alongside this we have a backdrop of numerous reports from various parties including the Office for Tax simplification (OTS), the All Partly Parliamentary Group (APPG), the Rock Review and most recently the Institute for Fiscal Studies (IFS). These reports have suggested changes to IHT rather than the complete removal of it. The proposals included:
- To make it harder for diversified businesses to qualify for business property relief, requiring an 80% trading test rather than 50%. (OTS).
- To simplify the IHT treatment of gifts. (OTS and APPG).
- To remove the capital gains tax (CGT) uplift on death, particularly where a relief or exemption from IHT applies. (OTS and APPG).
- To reduce the amount of IHT reliefs available, perhaps scrapping agricultural and business property reliefs (APR & BPR) and at the same time reduce the rate of IHT. (APPG).
- To restrict APR for landlords to land let for a minimum term of 8 years. (The Rock Review).
- To charge unused pension funds. (APPG).
IHT, the tax paid on the value of assets left on death, in its current form was introduced in 1986 with the concept of protecting poorer members of society by redistributing wealth from inherited legacies. The rational for the two main reliefs from IHT, for businesses and farms – APR and BPR, being to remove the need to sell and break up businesses or farms to finance IHT liabilities, protecting food production and security, entrepreneurship, and the economy.
However, one of the unintended consequences of the reliefs is the perceived ‘avoidance’ of IHT where wealthy individuals invest in land and businesses qualifying for APR and BPR. Many believe that this contributes to land values being so high compared to production value.
SO WHAT CHANGES MIGHT WE SEE?
With a Labour government we could see a hardening of the rules for IHT, in particular, in my view, the three most likely changes might be:
The removal of the CGT uplift on death, particularly where IHT relief is claimed - This would result in CGT payable on assets sold after death where IHT relief was claimed on death.
Changing the BPR mainly test - To qualify for BPR under the current rules the business must be mainly trading which is a more than 50% trading test. For CGT purposes the test is a substantially test, more than 80% trading. It has been suggested the rules should be aligned. If the BPR legislation changed to a substantially test, this would result in many farming and more likely estate businesses no longer qualifying for BPR due to the extent of investment activities in the business. Most farm businesses have some form of investment activities such as the letting of property. Landowners should consider the impact of this potential change and consider their future business structure to protect relief or potentially bank relief whilst the property qualifies.
Changes to APR and BPR to reduce avoidance - This might be to take on the recommendation of Baroness Rock so that APR only applies to landlords where land is let for a minimum term of 8 years.
Labour could extend this principal to owner occupied farmland allowing APR only to those who have been farming for a certain period or have a historical association to farming. They might also tackle contract farming and share farming arrangements to ensure only ‘genuine’ farmers receive relief.
It should be noted that, when answering questions from the CLA President Victoria Vyvyan at the CLA conference in December, Steve Reed, The Shadow Secretary of State for Environment, Food and Rural Affairs, ruled out the Labour party removing APR.
Removal of IHT
The next budget is expected on 6 March and there have been reports that our Chancellor, Jeremy Hunt, might scrap IHT under pressure from Tory MPs to announce tax cuts to boost chances of victory at the election.
Only 4% of estates pay IHT so there could be backlash that any cut only benefits the wealthiest. However, it would not be completely unprecedented as many other countries have abolished their equivalent of IHT.
Whilst IHT is not a huge contributor to the public purse, it has raised £4.6bn in the tax year to October 2023 so far, therefore if IHT were abolished how would the lost revenue be recovered? Further there would be other consequences of scrapping of IHT such as how gifts in lifetime would be dealt with, whether these would become chargeable to CGT, without holdover relief, which may prevent lifetime giving of assets, and whether the CGT uplift on death would cease to apply, as well as the impact on trusts.
So whilst at first sight the removal of IHT might seem attractive there would likely be less attractive ramifications to its scrapping, particularly given currently most agricultural estates qualify for relief from IHT and planning can be undertaken to minimise it.
Retaining IHT and simplification please
The most complex, and potentially unfair, area of the IHT legislation and where the most misunderstanding arises is the operation of the rules on the residence nil rate band (RNRB). For a married couple who qualify for the latter, they could leave up to £1M of assets with no IHT liability. However, the qualifying criteria results in many individuals not benefiting from the relief and the rules are complex. This is an area which should be simplified.
The current nil rate band (NRB), the amount up to which an estate has no IHT liability, is £325K per individual and has not been increased since 6 April 2009. If the NRB increased with inflation it would currently stand at around £500K. Therefore, the legislation would be hugely simplified, and fairer, if the RNRB were removed and replaced with a NRB of at least £500K per individual.
The other area of huge uncertainty for landowners is whether relief would continue to apply on land taken out of agricultural occupation and put to environment use. Clarity is required on this if government wish to achieve their environment targets and encourage environmental land use. We are still waiting for feedback following the call for evidence.
Finally, the CLA have long lobbied for recognition of the ‘single business unit’ acknowledging that farming and land use has changed over the years. A commercial rural business now often involves several enterprises, one of which might be deemed investment for tax purposes but is an important part of the overall commercial rural business. Recognising a single business unit, with one set of tax rules, would simplify the accounting and tax treatment of the various enterprises and would reduce the economic cost of running the business as well as promote investment in the rural business
Conclusion
My initial reaction is that scrapping of IHT may be a step too far for the Conservatives. There may be bigger wins for them by reducing the VAT rate (and maybe registration threshold) and increasing the income basic rate band - the level at which higher rates of income tax is paid, as well as the threshold at which child benefit is removed and IHT is paid, as discussed above.
Meanwhile, the threat of a Labour government does bring some uncertainty over the future of reliefs from IHT and landowners should consider the impact of potential changes on their own position and consider planning in advance of the election.