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The future of inheritance tax (IHT) reliefs

IHT reliefs have been a hot topic for a while and never more so since think tank the Institute for Fiscal Studies (IFS) published its report titled ‘Raising revenue from closing inheritance tax loopholes’.

The report outlined what the IFS believes are issues with the current IHT regime and suggested restricting some types of relief from IHT to raise revenues and make the tax ‘fairer’.

In the report, the IFS suggests:

  1. Targeting business relief (BR) on shares listed on the Alternative Investment Market (AIM)
  2. Capping or outright abolition of agricultural and business reliefs
  3. Ending the tax-free inheritance of pension pots to bring pensions within the IHT net

In this article we look at the three proposals and the likely implications should they be adopted.

 

Targeting BR on AIM listed shares

Currently, qualifying AIM listed shares held for a minimum period of two years before death qualify for 100% relief from IHT as part of business relief.

In its report, the IFS states that the relief ‘distorts investment choices’ for older people particularly, who wouldn’t otherwise choose to invest and that there is no rationale for this relief based on supporting family businesses as AIM shares are held at arm’s length in a similar way to regular shares.

Whilst the IFS estimate that the removal of this relief may raise £1.1bn in the current tax year, rising to £1.6 in 2029-30, it is possible that without any tax advantage for these types of shares, the AIM market may see a decline in investors as a result.

For a lot of people who are not risk-averse, this is currently a common investment strategy and the removal of the relief would mean they would need to look at other tax planning options.

 

Capping or abolishing of Agricultural Property Relief (APR) and business reliefs

The IFR report says that there is a strong economic case for completely abolishing agricultural and business reliefs (with the latter including the relief for AIM shares), which currently cost around £400 million and £1.4 billion a year, respectively.

 

What is BR?

BR removes or reduces the value of a business or its assets for IHT where there is occasion to charge  (to include property and buildings, unlisted shares, and machinery).

Currently there are several requirements to qualify for BR and generally speaking you get BR at a rate of either 50% or 100% of the asset value so long as the deceased owned the asset for a minimum period of two years before death.

BR is not applicable for a company which wholly or mainly deals with securities, stocks and shares, land or buildings or the making or holding investments.

 

What is APR?

APR allows you to pass on agricultural land or property used to grow crops or rear animals free of IHT.

To qualify for the relief, the land or property must have been owned and occupied for agricultural purposes for a minimum period of either two years if occupied by the owner or seven years if occupied by someone else. Farmhouses and cottages may be eligible for the relief if of a nature and size appropriate to the farming activity. The relief is again either 50% or 100% as with BR.

 

What would be the effect of capping or abolishing APR and BR?

Capping or abolishing these reliefs seems to contrast with HMRC’s longstanding views on the importance of BR and APR in encouraging businesses and/or farming to support and grow the economy.

The obvious foreseeable effect of restricting either relief is that successful family businesses or farms would be detrimentally affected, and a sale could be forced to enable any IHT to be paid.

 

Ending the tax-free inheritance of pension pots to bring pensions within the IHT net

Currently, defined contribution pension pots can be passed free of IHT, and those with sufficient other wealth to fund their retirement are able to use their pension as a way of passing assets down a generation tax free.

The IFS argues that the tax-free passing-on of pension pots serves no economic purpose and is clearly unfair’ and they should be brought into the scope of IHT. The report says that including the value of defined contribution pension pots in estates would raise around £200 million in the present tax year, rising to around £400 million in 2029–30.

However, there is a strong argument that such a move could discourage people from saving for their retirement.

 

The IFS has clearly focused on a short-term increase in revenue with these proposals but hasn’t considered the longer term effects on individuals, businesses and the economy. Whatever the future for IHT reliefs holds, get in touch with Michelle Wilson at michelle.wilson@cowgills.co.uk to understand the tax implications of passing on your wealth, or contact us via our website.

future of inheritance tax
Disclaimer

The information was correct at time of publishing but may now be out of date.

Tax
Posted by Michelle Willson
22nd May, 2024
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