Making inheritance tax fairer will raise revenue, says the IFS

The value of assets chargeable to UK inheritance tax (IHT) can be reduced by claiming tax reliefs. Three reliefs (Business Property Relief (BPR), Agricultural Property Relief (APR) and IHT exemption for pension pots) have been targeted by the Institute of Fiscal Studies (IFS) for reform, as it views them as unfair, expensive, and bad for economic growth by distorting economic choices.

As an economic think-tank, the IFS has published reports across a broad spectrum of tax policies, and it is not the first time that it has made suggestions in this area. Nonetheless, its ideas continue to be thought provoking so please speak to the authors or your usual KPMG in the UK Family Office & Private Client contact to understand how they might impact on your and your family’s estate plan.

IHT could raise £7.5 billion in 2024/25, approximately 0.7 percent of all tax receiptsopens in a new tab. Latest HMRC statisticsopens in a new tab estimate 3.73 percent of UK deaths resulted in an IHT charge. Asset values taxed at the 40 percent rate can be reduced by reliefs, three of which the IFS has targeted for reform. It has outlined three recommendations that could raise up to £2.7 billion in the current tax year:

1. Remove BPR on AIM shares – Shares listed on the Alternative Investment Market (AIM) can qualify for 100 percent BPR. The IFS estimates removing this relief could raise £1.1 billion in the current tax year and prevent older people distorting investment choices by looking to minimise IHT liabilities, although tax is likely to be only one consideration of many when looking to invest in these typically risky assets.

2. Cap BPR and APR to £500,000 per person – Depending on the facts, 100 percent or 50 percent of the value of business and agricultural assets can qualify for BPR and/or APR. HMRC estimateopens in a new tab the cost of BPR in the current tax year is £1.3 billion (including cost of AIM share relief) and £365 million for APR. How a cap would be applied in all ownership structures, (for example where trusts are shareholders) as well as whether £500,000 is the right level for the cap are likely to give rise to much debate, if this recommendation were to be adopted.

3. End the passing of pensions IHT free – The IFS has not quoted any statistics about the estimated value of assets in defined contribution pension pots currently outside the scope of IHT, but estimates that bringing them in scope (with some allowance for paying income tax on the pot post-death) could raise £200 million initially. This reform could have the most impact of the three in terms of scale of taxpayers affected and perhaps calls into question most fundamentally (for all, not just the very wealthy) the life cycle of taxation for individuals in the UK.

On the one hand, it is intriguing how IHT gets so much coverage generally given the small number of estates who pay it. On the other hand, this uncertainty speaks perhaps to how misunderstood IHT is. Ipsos polling recently showedopens in a new tab IHT was seen as the most unfair tax, yet it rated sixth on the list to be prioritised for cuts. Depending on the outcome of the consultation about the future of IHT announced in the Spring Budget on 6 March 2024, more taxpayers could be brought within scope in future and reliefs might attract even more attention.

For further information please contact:

• Jo Bateson opens in a new tab
• Daniel Crowtheropens in a new tab