Inheritance Tax: Change is in the air …

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Date16 Oct 2018
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Dermot Campbell, CEO Kuber Ventures, share his thoughts on the potential changes afoot following the official consultation on IHT.

For Treasury Ministers, Inheritance Tax (IHT) is the gift that keeps on giving.

Inflation, not least of property values, pushes more and more estates into the IHT net, thus the Exchequer’s tax take grows and grows.

Unsurprisingly, those facing the possibility of an IHT bill on the death of a close family member have sought ways to mitigate or even cancel out such a levy. But times may well be changing, and anyone using one particular route needs to be very careful as to how any change may affect them.

More on that in a moment. First, some figures.

In 2010-2011, just three per cent of estates were liable for IHT, paying a total £2.7 billion. In 2017-2018 almost double the relative number of estates are paying almost double the amount of tax.

The obvious question would be: is this process remorseless, or is there some natural ceiling? In the near term, we believe the answers are respectively Yes and No. Despite the changes to IHT on residential property, this trend continues as asset price inflation persists.

There is a consensus that the current figure of one in 20 families having to pay IHT will increase to one in ten during the next decade or so.

This is welcome news to the Treasury, for two reasons. One is that, while ever-increasing revenues from IHT may have some dampening effect on the animal spirits of entrepreneurs who wanted to leave substantial legacy to their nearest and dearest, there is nothing like the disincentive effects that would follow a doubling of, for example, the yield from Income Tax.

The second is that, to put it bluntly, those who pay IHT, the deceased, are in no position to complain. One may add a third attraction for Treasury Ministers, which is that a tax paid by what remains a minority of the population is unlikely to raise the hackles of the majority.

As the prospect of an IHT bill has increased, so have perfectly legal schemes to avoid it. Some of the most popular centre on Business Relief, formerly Business Property Relief, the name by which it is sometimes still known.

Business Relief was introduced in the mid-Seventies, with the aim of preventing family businesses from having to be sold in order to pay IHT’s more stringent predecessor levy, Capital Transfer Tax (CTT). It has remained in place since CTT was replaced by IHT in the 1986 Budget.

The relief’s main features are evidence of the original intentions of those who legislated for it. There is 100 per cent Business Relief on a business or an interest in a business and on shares in an unlisted company which includes shares issued under the Enterprise Investment Scheme (EIS).  There is 50 per cent relief on shares controlling more than 50 per cent of the voting rights of a listed company and on land, buildings or machinery owned by the deceased and used in a business they either owned or were a partner in.

Also, 50 per cent relief is available on land, buildings or machinery used in the business and held in trust from which the business is entitled to benefit.

For the purpose of Business Relief, shares on the Alternative Investment Market (AIM) have been regarded as unlisted since Ken Clarke brought them into scope in the mid-90s.

But as with several official schemes established either to preserve or promote small businesses, Business Relief proved vulnerable to exploitation by those following the letter rather than the spirit of the law. The original principle was that businesses would make use of those schemes that fit their own circumstances, such as the family firms at which Business Relief was aimed.

However, it is rarely long before investment vehicles are being established around the tax break in question with the specific intention of taking advantage of it. This, in turn, attracts the attention of the Treasury and others, and moves are put in hand to prevent what is seen as a misuse of the scheme in question.

Sure enough, an official consultation on IHT has just closed. It was conducted by the Treasury’s Office of Tax Simplification (OTS) at the request of Philip Hammond, the Chancellor. The items listed in the scope of the review included: “Complexities arising from the reliefs and their interaction with each other and the wider IHT framework.”

The OTS will publish a report with “specific recommendations” for Ministers in the autumn.

Should this follow the pattern of the Chancellor’s move against so-called capital preservation EIS vehicles, with Mr Hammond responding to the report in his Budget at the end of the year and action following in the financial year beginning April 2019.

What sort of action might that be? The “nuclear option” would simply abolish Business Relief, but this would cause AIM’s liquidity to dry up and EIS to lose a lot of its appeal. A far from ideal outcome, to put it mildly.  Catastrophic would be a better description.

More likely, perhaps, is, as with the EIS reforms, a move against the asset-backed Business Relief schemes being mass-produced by providers on an industrial scale.

As the OTS works on its report, this may prove a good time for investors to look at less contentious IHT strategies, such as AIM and EIS investment. Business Relief was not set up to help wealthy people avoid IHT, and it seems probable that the Treasury will seek to return it to its original purpose.

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