After several months of noise regarding changes to inheritance tax Rishi Sunak’s budget avoided even tentative adjustments to the tax altogether.
Headline predictions included a reduction of the rate from 40% to 10%, removal of lifetime gifting allowances, and the scrapping or severe curtailing of business property and agricultural property relief.
Changes to the tax were hotly tipped after a review by the Office of Tax Simplification the (OTS) in July, and proposals from a cross-party group of MP’s.
The Chancellor sidestepped the web of complication that is inheritance tax with no mention of any simplification or changes. The review of inheritance tax conducted by the OTS was commanded by Phillip Hammond and it may be the new Chancellor doesn’t have any inclination to make changes in the current climate.
Former Chancellor Sajid Javid, who resigned in February after refusing to fire his team of aides, had also said in October 2019 at the Conservative party conference that scrapping inheritance tax was ‘on his mind’.
HMRC collected a record sum of £5.4bn in inheritance tax for 2018-19, with the average amount of tax paid being £179,000. However, less than 5% of deaths resulted in a payment.
Inheritance tax is currently payable at a rate of 40%, but only after a nil rate band allowance of £325,000 per person. This can be extended on a main residence by £150,000 (£175,000 in April 2020) due to the residence nil rate band introduced in 2015 by George Osbourne.
Investors that hold certain AIM shares or unlisted investments for two years, and up until death, can avoid an inheritance tax bill under the business property relief rules. The OTS had previously questioned the inclusion of AIM as an inheritance tax mitigator.
Business property relief was originally set up to prevent the break-up of family businesses, but was extended to allow third-party investors to invest in smaller companies.
The scrapping of the AIM qualification for inheritance tax relief would have had serious implications for the whole junior market. Some pundits have suggested that as much as a third of the money invested in AIM is from inheritance tax portfolio providers.
No change to 40% rate
There had been calls to cut the rate of IHT from 40% to 10% by a group of cross-party MPs.
The All-Party Parliamentary Group on Inheritance and Intergenerational Fairness suggested that there should be no nil rate band allowance given, and that it should be replaced with a more modest tax rate, with none of the other inheritance tax loopholes available.
Alongside this suggestion, the group had called for the scrapping of the residential nil rate band.
It also proposed the complete removal of inheritance tax relief on lifetime gifts, and gifts out of income. The OTS had also suggested in its review that the seven-year rule for gifts to be free of inheritance tax be cut down to five years.
BUT … watch out for Business and Agricultural Property Relief Reform
Always a target for reform and there is a strong case for business property relief at some point being restricted to trading companies where the business passes to family members who in whole or part carry on that business for at least five or ten years. Other circumstances may become increasingly harder to justify once the economy is firing once more on all cylinders. Far-fetched? Only as far-fetched as reducing entrepreneurs’ relief from £10m to £1m from 11 March! Look at the Chancellor’s rationale for this … it applies equally to business property relief.
Incidentally, the changes to entrepreneurs’ relief will increase the amount of tax paid by businesses sold at a profit of over £1m. We should now see advisers working to extract value from these businesses prior to sale.