Should you plan now for inheritance tax changes?
Inheritance Tax under its current guise has been with us for almost 40 years. There were some major changes in 2006 when Gordon Brown’s government altered some of the rules in relation to the inheritance tax of certain trusts and there has been some ‘tinkering around the edges’ over the years, including the introduction of the Residence Nil Rate Band from April 2017. However, the basic structure, for example, the concept of ‘Potentially Exempt Transfers’ (PETs – i.e. the need to survive 7 years after a gift is made for it to fall outside of the IHT estate) and the main reliefs for business and agricultural property have remained unchanged.
There has been plenty of speculation and rumours of impending change over the years, sometimes prompting people to take action. A number of trusts were established in 1997 ahead of the General Election that put New Labour and Tony Blair into power. Those trusts were made in anticipation of changes thought to be likely under New Labour – changes that never came to pass.
In the last few years there have been a number of studies and reports into IHT, notably by the (now disbanded) Office of Tax Simplification in 2019 and by an All Party Parliamentary Group in January 2020. Both had multiple suggestions that ranged from the minor to the radical.
On Tax Administration and Maintenance Day in November 2021 the Government announced that meaningful reform of IHT was ‘off the table’ for the duration of this Parliament. However, we are now nearing the end of the current Parliament and IHT may become something of a battleground for the two main parties.
In September this year, it was rumoured that Rishi Sunak was considering cutting, possibly even scrapping IHT – though the Government denied this.
However, there are also rumours that Labour are looking to make changes to reduce Business Property Relief (BPR) should they (as seems likely) form the next Government.
That is somewhat disturbing news for businesses, their owners and those who invest in unlisted companies. BPR gives IHT relief at either 50% or, more commonly 100%, on the value of certain shares, businesses and property used in those businesses. It is relevant to note that the companies/businesses involved must have an activity that is mainly in the nature of a trade (as opposed to investment) and that the trading activity cannot be ‘dealing in land’.
I mention this to make it clear that the relief is already targeted such that, it benefits those carrying on a trading business. It follows therefore that were it to be diminished, it would be trading businesses that would bear the brunt.
Scrapping the relief entirely would cause huge damage and seems unlikely unless it is mitigated by some other change (e.g. a reduced rate of IHT on business property, or a business property nil rate band akin to the Residence Nil Rate Band.)
Alternatively, the scope of the relief could be scaled back, for example;
- It could be altered such that a minimum 5% ownership of the business is required to qualify. That would immediately knock out the relief on AIM investments that many portfolios now contain – and would clearly impact the value of those investments considerably.
- The treatment of let cottages that can sometimes qualify for relief where part of a larger trading business (following the principle in Balfour), could be changed such that those let properties never qualify.
There are, obviously multiple possibilities, ranging from complete withdrawal of BPR that would significantly impact many businesses, to specific changes to parts of the legislation reducing the impact. The former would increase the IHT take more considerably, the latter would be more of a political statement than a ‘revenue raiser’.
The question arises; how much should you let these possible future changes to tax rules, dictate your actions now?
I would not recommend taking action now, solely to avoid a tax change that may never come. However, if you have been considering undertaking planning/making gifts and have just not yet progressed those thoughts, it would make sense to push forward with those plans now under the current regime.
Moreover, if you have been putting off or just never gotten around to considering your IHT planning, again it makes sense to take advice now.
Whether changes to the IHT regime are forthcoming or not, it seems unlikely that the regime for IHT planning will be more beneficial under the next Government (regardless of its colour) than it is now.