Tax

Inheritance Tax: end exemptions, scrap reliefs and halve the headline rate

Echoing the report by the All-Party Parliamentary Group on Inheritance and Intergenerational Fairness, and ahead of the Chancellor’s Budget on Wednesday 11 March, AAT has called for several changes to be made to the current process around inheritance tax. Including halving the current headline rate from 40 per cent to 20 per cent.

AAT recommends that the headline rate of Inheritance Tax (IHT) be reduced from 40% to 20% and simultaneously, the majority of exemptions and reliefs should be ended. Mark Farrar, AAT Chief Executive, explains why.

Although only 4% of estates are liable for IHT, more than 50% of the electorate are concerned about this tax, perhaps contributing to its label as “the most hated tax” amongst the British public.

What are these concerns, why is it so hated and how could it be made fairer and more effective? These are all issues that AAT has considered carefully in recent years.

Avoidance

IHT can be significantly reduced, in some cases avoided altogether, with careful tax planning. Many exemptions and reliefs are complicated or at the very least, not widely understood, often requiring  professional advice for those that can afford it. It seems neither fair or desirable to have a tax that is so difficult to navigate that only the well advised are able to minimise their or avoid liability.

Double taxation?

Some commentators complain about perceived double taxation i.e. having paid tax throughout your lifetime,  you then have to pay it again in death. This conveniently ignores the reality that no tax is paid by the deceased precisely because they are dead! It is effectively the recipients of the estate who will receive a little less because of tax, those who in many cases will have made little or no contribution to the wealth amassed.

Double taxation arguments are very rarely used in relation to the many other taxes’ individuals have to pay which will largely be paid with money that comes from income that has already been taxed. It therefore seems curious to apply the argument here.

Continue, reform or remove?

Given the unpopularity of this tax, its relatively high headline rate; the inherent unfairness of many of the exemptions and reliefs and the increasing level of hostility towards its imposition; continuing with IHT in its current form for much longer is both unlikely and unwelcome.

For the same reasons, it’s no surprise that many have called for it to be scrapped altogether. However, this ignores the fact IHT raises well over £5bn a year and is expected to reach £6.3bn by 2023/24 according to the Office for Budget Responsibility. If scrapped, where is this much needed money for investment in public services going to come from?

There also remains a case for taxing wealth in this way as Winston Churchill stated, IHT serves as, “…a certain corrective against the development of a race of idle rich.” It might not be put in such strong terms today, but the need to provide some form of redistribution of assets accumulated over a lifetime is broadly accepted by most political parties.

In light of the above, AAT recommends that IHT be maintained but that reform is essential.

Halving the headline rate of IHT

Our response to the Office for Tax Simplification (OTS) in 2018 called for an end and reduction to many of the various reliefs and exemptions for IHT. Building on those recommendations, to increase the likelihood of acceptance amongst those who currently benefit from such exemptions, as well as making reform more politically acceptable and palatable to the wider public, AAT also recommends halving the headline rate of IHT from 40% to 20%. 

By halving the very high headline rate, incentives for avoidance or evasion will also be removed, which is likely to increase the likely tax take.

Exemptions and reliefs

As AAT highlighted in its submission to the OTS in 2018, Business Property Relief (BPR) and Agricultural Property Relief (APR) cost the taxpayer £1bn and lend themselves to encouraging assets to be held primarily, and often purely, for tax reasons.

For example, BPR, introduced in 1976 to make sure successful family businesses did not have to pay large tax bills to retain control of the business, was never designed as an avoidance measure or to promote AIM listed shares. There is no sound basis for allowing such an exemption to continue and that’s why AAT has long recommended this exemption be removed.

Charitable exemption

Likewise, the charitable exemption is an unnecessary complexity that adds little, if any, value. There is no evidence to suggest the exemption has led to an increase in charitable giving since it was introduced eight years ago. Although HMRC figures show that the cost of IHT relief for charitable donations rose by 79 per cent to £840m in the five years to April 2017.

This substantial additional cost to the taxpayer does not equate to any more charitable giving than would have otherwise been the case. It simply means that some estates are gaining substantial tax savings. That’s why AAT has long recommended this exemption be removed too.

The only exemption allowed should be for spouses and direct descendants up to a value of £500,000, including property, with 20% IHT payable on any amount thereafter.

Simplification

These changes would make the reservation of benefit rules and the POAT (pre-owned assets tax) code entirely redundant, removing considerable bureaucratic headaches for many – including HMRC.

By removing almost all of these exemptions and reliefs – as well as reducing the headline rate – the regime will be simple enough for all to understand and low enough for people to voluntarily pay, everyone would be treated equally and know exactly what their tax position is.

An additional benefit would be the substantial savings for individuals who will no longer have to pay large sums of money to solicitors, financial advisers or other professionals, to reduce their liability. Some in the legal and financial sectors may well oppose such reforms as a result.

Removing reliefs and exemptions will also mean that many more of the 500,000+ who die in the UK each year will be brought into the IHT tax base. Broadening the tax base in this way is also likely to increase the tax take.

In summary

Whether or not AAT’s recommendations would make IHT any less “hated” is open to debate but they would certainly ensure a much fairer and more effective tax, whilst still delivering significant sums of money to invest in public services and/or deficit reduction. Surely that’s an ambition most can agree on?

Further reading:

Mark Farrar is the Chief Executive of AAT.

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