Should Parliament Scrap IHT?
A number of the quality dailies and the Daily Telegraph have today reported on calls by the Resolution Foundation (a think tank) for UK inheritance tax to be scrapped.
The report is called ‘Passing On – options for reforming inheritance taxation’ (the ‘Report’) and is available here for those interested in reading it - https://www.resolutionfoundation.org/publications/passing-on-options-for-reforming-inheritance-taxation/
I have not reviewed each section of the Report in detail but have simply commented on the areas I found most interesting.
Summary of the Report
The Report suggests some interesting alternatives to the current system of taxing an estate on death, which many believe is inherently unfair. It considers the perceived unfairness of some of the exemptions from inheritance tax, such as Business Property Relief (‘BPR’), Agricultural Property Relief (‘APR’), and the ability to transfer assets free of inheritance tax under the seven-year rule (i.e. if an individual gifts an asset it will not be subject to IHT if that individual survives seven years after having made that gift). The Report asserts that the unfairness with these reliefs lies in the fact that they are only really available to the wealthy. Those individuals with money to invest who are conscious of the potential liability to IHT on their estate on death may choose to invest in assets that qualify for reliefs such as AIM listed shares, agricultural land and may also be able to make lifetime gifts whilst still relatively young to take advantage of the seven-year rule. In addition, such individuals may be in a position to make ‘regular payments out of income’ which are also exempt from IHT. If you are on a low wage, with your wealth concentrated in your property, none of these options are likely to be available to you. The report seeks to address some of these perceived inequalities.
The headline suggestions are as follows:
Scrap inheritance tax in its entirety
Replace it with a ‘Lifetime Receipts Tax’ – as the name suggests the tax liability would fall on the recipient rather than the estate
Give each individual a lifetime allowance of £125,000 (indexed). Amounts received in excess of this would be taxed at 20% and amounts received in excess of £500,000 would be taxed at 30%
There would be an annual allowance of £3,000 per annum
Transfers to spouses and charities would be exempt
Restrict BPR to small family businesses where the beneficiary receives at least 25% of the business and the donor has/had a demonstrable working relationship with the company; and
Introduce a cap on the value that BPR can be claimed against
Increase the minimum holding period to five years and a clawback if inherited business assets are sold on within a specified time of receipt
Restrict APR by introducing a farmer’s test (i.e 80% of the beneficiary’s assets must comprise of agricultural property)
Remove the tax free treatment of certain pension pots inherited on death
Scrap the forgiveness of CGT upon death.
There is a lot to digest in this report (which runs to 42 pages), and some of it definitely has merit (which is perhaps unsurprising given that Emma Chamberlain at Pump Court Tax Chambers was one of a number of individuals consulted), but I would query whether Philip Hammond has any real appetite for significant change, irrespective of the fact that he wrote to the Office of Tax Simplification in January requesting a review of the current IHT regime. IHT is a political hot potato, and any attempt to change the system to make it ‘fairer’, to the extent suggested in the Report, may alienate the Tory’s core support (owners of inherited landed estates, entrepreneurs with significant investments in their own and other AIM listed businesses etc).
Whilst this may all be pie in the sky, I am personally sympathetic to some of the ideas that make up the concept a Lifetime Receipts Tax. Some suggestions do seem fairer, others need a lot of work and some points have not been considered at all. For example, it would do away with the rather arbitrary ability to give assets away free of inheritance tax during one’s lifetime (subject to the seven year rule), but potentially paying 40% tax if the same assets are given to the same individual on death. Why is this distinction made? Why is it appropriate to tax one transfer but not the other?
APR and BPR
I do believe some aspects need further thought. I can understand why APR should be subject to a ‘farmer’s test’. Individuals with power to invest have been investing in agricultural property with the sole intention of avoiding IHT. This in turn has driven up the price of agricultural land, making it harder for individuals who actually want to farm the land to purchase it. The report suggests a ‘farmer’s’ test along the lines of the tests applied in Ireland or France. This should limit the relief to active farmers rather than investors (which presumably was the intention in the first place).
I am not entirely convinced by the suggestion to curtail BPR so that it is available only to small family businesses. BPR does encourage investors to invest in more risky equities on the AIM. By taking away the incentive to invest in this market, there is a risk that investment in more riskier unlisted businesses may drop significantly, which would have an unintended impact on these types of companies.
Trusts
Another area where the report is light on suggested alternatives (and it acknowledges this) is that of trusts. The IHT regime around trusts is already quite punitive. There is an immediate 20% IHT charge on the transfer of assets to trust (the entry charge), and the anniversary charge of 6% every 10 years on the value of assets in the trust (barring excluded property). There is also an IHT exit charge on transfers out of the trust. These rules have resulted in a significant drop in the use of trusts in the UK since they were implemented in 2006. The report simply says ‘Redesign the trusts tax regime to reflect Lifetime Receipts Tax’. That is great. But please suggest how…? The Report further suggests that the government’s attack on Excluded Property Trusts (set up by non-domiciled individuals with a view to protecting non-UK situs assets from UK IHT once the individual has become deemed domiciled) should go further, but does not suggest how.
CGT
The Report suggests that CGT should not be forgiven at death. As many will know, assets that form part of an individual’s estate are rebased at death, so that the individual receiving the asset receives it at the current market value as at the date of death. If, as I think the Report suggests, CGT should be payable on death, then are we not double taxing? Taxing the disposal from the estate and the receipt by the individual inheriting seems extremely harsh. Both CGT and IHT are capital taxes, the reason for not charging CGT on death is because the asset will be subject to another capital tax, namely IHT. If you scrap the exemption from CGT on death, then the estate will pay tax at 28% on the gain and the individual would potentially pay 30% on the receipt (under the suggested Lifetime Receipts Tax). This seems excessive. I would have thought no politician would have an appetite for advocating this.
Conclusion
I do not believe that the current government will have any appetite to overhaul the inheritance tax regime to this extent. This Report nevertheless poses some interesting points and I do hope that it will trigger a debate in this area as IHT does need to be looked at. It is a widely disliked tax and rightly or wrongly is perceived as being unfair and optional for the wealthy. There are some suggestions in the Report that warrant further thought and discussion, there are, however some gaping holes (the treatment of trusts) and some suggestions that simply do not appear workable to me (implementing CGT on death).
