IF ISA subscriptions are on the rise

Dramatic changes to the inheritance tax system remain unlikely despite recent speculation, experts have suggested. A recent report from the All Party Parliamentary Group (APPG) on Inheritance and Intergenerational Fairness had sparked intense press coverage that things might be about to change in the upcoming Budget, but those in the market have poured cold water on this.

What many have failed to note is that, as clearly stated on the report’s title page, “This is not an official publication of the House of Commons or the House of Lords. It has not been approved by either House or its committees.” 

So it should not be inferred from the report that there is a consensus amongst MPs that they want these or any changes to IHT.

And it’s easy to see why; if implemented, the new system would replace a 40% tax on estates valued above £1 million (for couples) with a 10% or 20% tax above £650k (for couples). From a voter’s perspective, it could very easily look like it only benefits wealthy people, hardly leveling up wealth in the UK in the way the current government wants to be seen to deliver. Robert Palmer, director of campaign group Tax Justice UK, has already commented that, “[The measures] would lead to a pretty dramatic tax cut for some of the wealthiest families in the UK.”

The proposed changes

The APPG suggests:

  • Replacing the current inheritance tax regime with a flat-rate gift tax payable both on lifetime and death transfers. The APPG suggests a rate of 10% or 20%.
  • The abolition of all reliefs other than spouse and charity exemptions. But for land and business assets there would be an option to pay tax on death over 10 year instalments in interest-free instalments
  • A death allowance at a similar level to the current nil rate band to ensure that small estates not currently paying tax will remain unaffected by the changes. 
  • An annual lifetime allowance of £30,000 on lifetime gifts.

The reasoning is that, “A flat-rate gift tax with fewer reliefs would be simpler, more broadly based, lead to less avoidance and ensure the UK’s competitiveness in attracting wealthy people to live (and die) in the UK.”

That said, the APPG also states in the report, “There are no easy solutions, which is why other countries vary in approach, and why UK governments have tended to leave IHT alone since 1986.”

What about lost taxes to the Treasury? 

The report itself acknowledges that, “the lack of hard data on how many people are actually passing on wealth during their lifetime and by how much in the form of cash gifts makes informed policy making difficult.” It goes on, “the additional tax on lifetime transfers and the abolition of reliefs may not compensate for the loss of revenue by the reduction in rate from 40% to 10/20% on death.”

There is also little data on lifetime gifts and so no guarantees on the cost of allowing individuals to give away £30,000 a year every year, including within seven years of their death. A new, potentially expensive, difficult to police and slow to implement lifetime gift data collection system would also be required to facilitate this part of the proposal.

Since the Treasury refers to IHT as, “an important contribution to the public finances”, this begs the question, would the government really sacrifice an unknown portion of its income from IHT in this way?

What about family and growth businesses?

The APPG has some confusing messages here. In its May 2019 recommendations for the OTS IHT review, the APPG acknowledged that, “Business Relief is sometimes said to be crucial for the support of the family business sector and it is generally well understood by business owners. It also incentivizes younger family members to become involved in the family business and become invested in its success.”

Nevertheless, its January report dismisses these benefits:, “Family businesses and farmers may object to the loss of 100% BPR and APR, but the 1 or 2% a year could generally be funded out of net income…those with farms and businesses are worse off under the new regime.”

At a time when the strength of UK businesses is of major concern to the government, there is no mention of any research or statistics that look at how these new costs could impact small and family businesses. There is certainly no suggestion of where the tipping point is for such businesses to require being broken up because of these additional costs, whether or not they are interest-free.

Even more confusingly, when considering the disadvantages of potentially replacing IHT with capital gains tax (CGT) on death, the report states, “There would likely still need to be reliefs for businesses and land which are illiquid and where the historic gains are often significant. The point about taxing a gain realised on death (as opposed to any type of voluntary sale or gift during the taxpayer’s lifetime) is that the deemed disposal arises as a result of something over which the taxpayer has no control – his death. It is a dry charge if he cannot sell the asset. Hence businesses will still demand reliefs.” Doesn’t the same apply to the 10% or 20% death tax proposed in the report?

Fiona Graham, Director of External Affairs and Policy for the Institute for Family Business told us, “Business Relief is a crucial relief from inheritance tax for family businesses.  Ultimately, without BR, the death of a major shareholder could lead to the end of an otherwise profitable business.” 

She continuted, “BR has a clear objective and purpose – it facilitates the continuity of family business management and ownership between successive generations, allowing businesses to develop a long-term approach which focuses on stability and sustainability.  It’s essential that the relief is maintained, and if IHT is overhauled that any new system continues to support the transfer of successful family firms.”

Any abolition of Business Relief could also have unintended consequences for the AIM market. The Office for Tax Simplification (OTS) asked in the second report of its IHT review last year, “whether it is within the policy intent of Business Relief to extend the relief to such shares, in particular where they are no longer held by the family or individuals originally owning the business.” But it made no recommendations on this subject and recognised instead the importance of Business Relief not only to family businesses but to growth investment in AIM. 

A sizeable portion of AIM shares is held by investment managers specifically because of their eligibility for Business Relief. Paul Jourdan, co-manager of the TB Amati UK Smaller Companies fund told Money Observer, “If the IHT exemption was removed it would put pressure on Aim, certainly over the short term. It would be a recipe for mayhem if it was not done in an orderly way and instead everyone had to sell out all at once.”

What next?

Whether the government will follow any of the APPG recommendations is unclear and probably unlikely. The APPG itself acknowledges the political power IHT holds and the attendant risk, even for a strong government, stating, “The unpopularity of the measure has been deployed effectively by politicians; in 2007 Shadow Chancellor George Osborne pledged to raise the inheritance tax threshold to £1 million. The perceived popularity of the move apparently caused the then Prime Minister Gordon Brown to halt his plans for an early election.”

The Conservatives’ election manifesto pledged ‘No income tax, VAT or National Insurance rises’ and there were no huge tax cuts, or rises. Prime Minister Boris Johnson has talked about keeping a tight ship. 

These items, along with the already packed agenda of Johnson’s administration, perhaps suggest we may see less rocking of the IHT boat than the widespread speculation on the topic has suggested. 


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