Reform IHT to increase revenue and public support, says Demos
IHT should be fairer, simpler and more transparent, says Demos, adding that lessons could be learned from overseas
The think tank ‘Demos’ published a report on 14 July 2024 titled “The Future of Inheritance Tax: Options to repair inheritance taxation in Britain”. The report has attracted some media attention and this article discusses some of its key findings and recommendations.
According to the report, Demos believes that the UK is entering a ‘New Age of Inheritance’, by which it means that inheritance is more significant for the economy and, as such, how it is taxed is also increasingly important. The report considers the assets within scope of inheritance tax (IHT), as well as the IHT rate amongst other things. A theme throughout the Demos report is hypothecation as the key to helping the public to understand IHT.
IHT revenues and rates
Demos compares IHT revenues in the G7 in 2022 and finds the UK raised less than the US, Japan, France and Germany. The report says the UK is one of only three OECD countries to offer uncapped 100 percent IHT relief for family-owned businesses.
The think tank uses these data samples (among many others) to conclude that IHT should be reformed not abolished, should raise more revenue whilst at the same time be made fairer. The challenge, as always, for tax policy makers is how?
Demos states that the average rate of IHT for estates worth between £2 million and £7.5 million was 25 percent in 2020-21, while those over £10 million only paid 17 percent, which it believes indicates that IHT rates need to be progressive.
Business assets
Depending on the facts, 100 percent or 50 percent of the value of certain businesses/business assets satisfying minimum ownership requirements can qualify for Business Property Relief (BPR) and, as such, currently qualify for exemption from IHT. Qualifying shares listed on AIM can also qualify for 100 percent BPR. Demos recommends BPR should be reworked to ensure it provides value for money. What this means and how to make it happen is much harder than it sounds.
HMRC’s IHT statistics indicate in tax year 2020/21, assets worth £3.2 billion qualified for BPR – a significant asset base to consider.
Earlier this year, the Institute for Fiscal Studies restated its recommendations to cap BPR at £500,000 per person. Demos says 77 percent of those claiming BPR in the UK in 2020/21 had business property worth under £500,000, so would be unaffected by such a change. Yet it acknowledges larger businesses valued at over £500,000 could be adversely affected if they had to sell off parts of their business to fund tax payments. These brief statements illustrate that reforming tax rules so often creates winners and losers.
The report offers high-level comparisons with some other G7 countries as follows:
- Japan offers a deferral rather than exemption for unlisted shares in certain family companies;
- In France, certain business assets can qualify for a partial exemption for up to three-quarters of their value; and
- In Germany, complex rules exempt transfers of certain assets up to EUR 26 million and taper relief above this amount up until EUR 90 million.
Learning lessons from other jurisdictions could be useful, although direct comparisons are always tricky due to the inherent differences in tax regimes in other countries. Additionally, the behavioural side of tax policy changes are often difficult to predict.
Hypothecation
Hypothecation (where taxes are assigned to pay for a particular spending commitment) could be used to gain support for tax reform. Demos asks if paying IHT could be framed as helping to provide for the country more generally rather than as an impediment to providing for one’s family.
Comment
The new Government needs to raise money for public spending and the silence on IHT reform in Labour’s pre-election manifesto is no doubt partly fueling the almost daily press speculation about possible changes in the Budget later this year. Demos’ report adds to the volume of research about the complexities of IHT reform. As is the case when any change is contemplated, it is hoped that policymakers listen to all views and do not make significant reforms without consulting those affected.
Separately, the Government published on 29 July 2024 a Policy Summary with its intention to change the scope of IHT from a domicile-based test to a residence based one from 6 April 2025 – our article on IHT changes from 6 April 2025 goes into more detail. This change could, amongst other things, bring more taxpayers within the scope of UK IHT and therefore make BPR and other IHT reliefs more important and relevant for them.
Individuals and trustees should keep a close eye on all aspects of IHT reform. We recommend that those potentially affected seek appropriate advice as soon as possible.
