BR Report 2019

14 15 BR WITHIN THE IHT CONTEXT FITTING IN AND STANDING OUT Higher value estates have lower average tax rates thanks to BR The latest IHT statistics confirm that higher value estates are making better use of Business Relief. HMRC’s commentary states: “the composition of assets changes between the various net estate bands. Where net estate value is less than £2 million, estates are likely to consist mainly of residential property and cash. Above this limit, estates are more likely to consist of securities and other assets, which attract reliefs like Agricultural Property Relief (APR) and Business Property Relief (BPR). This has a tendency to lower the average tax rates.” The analysis identifies two major contributors to the IHT tax liability in 2015/16: net estates valued £2 million and over accounting for 40% (£1.76 billion) of the tax liability in 2015/16 net estates valued at less than £500,000 accounting for 56% of all gross assets (made up of £26.5 billion in residential property and £13.7 billion in cash) and 87% of all probate estates. Further independent research has also found that: Effective inheritance tax rate paid halves from 20% for estates worth £2-3 million to 10% for those over £10 million Difference is due to asset composition of larger UK estates being focused on securities rather than residential property 3 This points to a large subset of smaller estates that could be well-served by estate planning, including Business Relief advice. Residence Nil Rate Band update In the 2019/20 tax year the residence nil rate band (RNRB) has increased to £150,000 per person. It will reach its maximum of £175,000 during the 2020/2021 tax year, with inflationary increases thereafter. Last year we speculated about the potential uptake of the RNRB, given the lack of awareness and understanding of the relief. Figures confirm that less than a quarter of the taxpaying estates in the 2017/18 tax year, just 5,420, successfully claimed for the RNRB. The continuing sentiment is that many are still not taking advantage of the tax break, put off by the complicated nature of the rules around both IHT and the RNRB. That has made the RNRB a target for the OTS review of IHT. In its IHT Review first report, while referring to BR as “broadly straightforward”, the OTS reported that the RNRB attracted a lot of comments due to its complexity. It also stated that some, “have suggested that the residence NRB is so complex it would be better to simply to remove it.” Could it be that BR is under less scrutiny than the RNRB? Even when the RNRB takes full effect, it will not stop the increase in IHT receipts. They are projected to grow to £6.3 billion by 2023/24 - an increase of over 20% on the 2017/18 figure. Our adviser survey also shows that, in the last year, there has been a slight increase in the impact of the RNRB on amounts that might be considered for BR investment. (See pages 42 to 45 ‘Adviser Survey’ in Section 4). Office for Tax Simplification IHT review The Office for Tax Simplification (OTS) published the first of two IHT reports in November 2018. The IHT tax gap is continuing to grow, rising 50% from £400m in 2012/13. This has been cited as a principal driver in the government’s request for the review. The aim is to eradicate underpayment of the tax as a result of the honest mistakes of innocent taxpayers trying to navigate the maze of IHT regulation. In this context, the first report, which sets out recommendations on administrative issues, is positive about BR: “the OTS’s focus will be on the practical application and complexity of these reliefs rather than major changes to the reliefs themselves. The evidence gathered so far suggests the reliefs are broadly working in a straightforward way.” Issues raised by respondents where there could be simplification, or where clarification of treatment is needed include the usual suspects: Furnished Holiday Lettings Joint Ventures and Limited Liability Partnerships The wholly or mainly test None of the 8 key recommendations made by the first report specifically references BR. The second report is due in Spring 2019. It will explore key technical and design issues. It will also consider in more detail suggestions made about the interaction of BR with the wider tax framework, and the potential distortions that may arise in relation to taxpayers’ decisions about and the timing of transactions, especially in situations where BR applies. Value for money in the shadow of Brexit Recent research suggests that the UK’s tax relief bill has grown to £164 billion in 2018/9 - more than the annual NHS budget. With Brexit front of mind, that is bound to focus some attention. The number one tax relief is reduced rates on things like food and energy, coming in at £53 billion. Next is the CGT exemption for main properties at £27 billion, followed by pensions income tax relief at £26 billion. The cost of BR to the treasury is relatively small at £710 million in 2018/19 4 - less than 0.5% of the total tax relief bill. The same research finds that the average individual gain from agricultural or business property reliefs on IHT is around £270,000. This is obviously valuable to claimants, but it’s interesting to note that only just over a third of it comes at a real cost. Market Update / BR within the IHT context COST OF BR 5 2015/16 £595 million AMOUNT OF BR CLAIMED 6 2015/16 £1,600 million BR CLAIMS VS COSTS 2015/16