What do the Super Bowl, the latest superhero movie and tax-advantaged investments have in common…?
Last weekend saw the latest instalment of the Super Bowl – one of the most watched single games of any sport on the planet.
It’s no surprise, then, that advertisements during the game are highly sought after and this year was no different, with the US networks giving a premiere to a trailer for this summer’s latest superhero blockbuster, ‘Avengers: Endgame’.
However, across the Pond, financial advisers are preparing for what increasingly feels like an endgame of a different sort: inheritance tax. Often referred to in the popular press as “Britain’s most hated tax” or “the death tax”, there has been a growing clamour in some circles to get rid of the tax altogether.
This theme was raised again at the end of January, when an All Party Parliamentary Group (APPG) of MPs and Lords published a report that suggested the current 40% inheritance tax regime should be replaced with a flat-rate gift tax of 10% payable on lifetime transfers of more than £30,000 per year, rising to 20% on gifts over £2 million.
It comes after last July’s Office of Tax Simplification (OTS) report, which unveiled several recommendations for major reform of the inheritance tax system. The report included a veiled suggestion (although, importantly, not a recommendation) that inheritance tax relief (through Business Relief) for Alternative Investment Market (AIM) shares might be scrapped because in many cases it was not providing the policy outcome that the relief was intended to offer.
That was followed by rumours in the autumn that Labour was planning to support proposals from thinktank the Resolution Foundation to replace inheritance tax with a charge on lifetime gifts. Then, as the General Election approached, Chancellor Sajid Javid told a meeting at the Conservative Party conference that he would consider getting rid of the tax.
In the event, neither the Labour or Conservative manifestos had much to say about inheritance tax and there were no plans to abolish or radically reform it from either of the main parties.
Nonetheless, this latest report from the APPG has reignited the debate.
Writing in the Times, Institute for Fiscal Studies director Paul Johnson agreed that the current situation is, at best, confusing. “In the UK those with serious wealth find all sorts of ways of paying nothing like 40 per cent tax on their bequests,” he says, going on to list various ways in which to mitigate the tax, including Business Relief.
First and foremost, though, it should be pointed out that no government-commissioned body has actually recommended abolishing inheritance tax – or even Business Relief. The OTS Report did not go that far in its recommendations, while the APPG’s report was not asked for by the government and therefore does not require any response.
While they do add to the general pressure on the government, they by no means are sure to result in any changes being made.
And it is important once again to remember why the OTS did not go so far as to recommend abolishing Business Relief for AIM investments: “The OTS notes that the government’s response to the Patient Capital Review consultation published in November 2017 stated the government’s commitment to protecting the important role that [Business Relief] plays in supporting family owned businesses and growth investment in AIM and other growth markets.”
Many in the industry have put it more bluntly, arguing that removing Business Relief would result in a substantial fall in the value of the AIM market overnight. It seems unlikely that the government would want to deal with the fallout of that at the same time as trying to stimulate UK businesses in the wake of Brexit.
In many cases, it appears that those advocating reform of the inheritance tax regime have been looking at it through a narrow lens, focused only on the tax itself, without seeing the bigger picture of what happens to the money raised by the tax and, perhaps just as importantly, the money placed elsewhere so that inheritance tax does not apply.
One would hope that the government will be receiving advice from all angles on this topic, thereby recognising the benefits that schemes such as Business Relief can bring to the wider economy.
It may be that, eventually, inheritance tax is abolished. But for such a move not to have widespread and damaging repercussions, the government will need to find some new approach to continue to incentivise the subsequent lost investment into Britain’s growth businesses.
As good as the Enterprise Investment Scheme and Venture Capital Trusts are at driving money into growth businesses, Business Relief has played to a slightly different type of business, many of which would not fall under the higher risk levels required for venture capital schemes. There’s a whole swathe of businesses that would therefore miss out on an important source of investment.
So have we reached inheritance tax’s end game? Only if something can be found to adequately take its place from the view of the Treasury, investors and businesses alike. Rather like the Avengers franchise, it seems unlikely that this will definitely be the last we hear of the issue.