While no tax can be said to be popular, it is certainly the case that inheritance tax is very unpopular with taxpayers. It is seen as a double charge: although income tax and capital gains tax will have been paid during lifetime, the tax man gets a second bite on death; and, at the rate of 40 per cent, that can be a pretty big bite as well.
The amount of inheritance tax being collected by the Treasury is growing. The Office For Budget Responsibility has forecast that the take from inheritance tax will increase from £3.1 billion in 2012-13 to £5.8 billion in 2018-19. The number of estates that are subject to inheritance tax will more than double over that period, from 4.8 per cent to 9.9 per cent.
The main reason for these increases has been the fact that the inheritance tax threshold, the nil-rate band, has been fixed at £325,000 from April 2009 and we have been told it will not be increased before April 2018. That nine-year freeze will mean that the threshold will have reduced significantly in real terms, by more than a third.
The Treasury has also been trying to increase the inheritance tax take from trusts. This started in 2006 when a 20 per cent initial charge was introduced for lifetime gifts into trust which exceeded the settlor’s available nil-rate band. This will be added to next year when, under the very misleading claim that this is pure simplification of the rules, the way the six per cent ten-year charge is calculated will be changed in a way that may increase inheritance tax charges within the trust where an individual makes more than one trust.
Further details of the changes can be found in Anna Moore’s article on page three. Despite these changes, it is important to emphasise that trusts still play a very important part in inheritance tax planning and in protecting and controlling family wealth.
A potentially more worrying development stems from the National Audit Office’s (NAO) report published in March 2014. In this report, the NAO questioned the wide scale availability of tax reliefs, including agricultural and business property relief (APR and BPR) for inheritance tax. It suggested that the Treasury should calculate the cost of such tax reliefs and consider whether they are still appropriate.
I find this report rather strange. Tax reliefs exist either to create fairness or to encourage a particular form of behaviour. Business assets and agricultural property are both really important to the economy in creating wealth and providing jobs. Therefore it has long been a policy decision that they should benefit from favourable tax treatment, which is provided through these reliefs. In effect they are taken outside the charge to inheritance tax on the death of the owner: without the relief, a sale of the business/farm would often be unavoidable following the death of the owner, in order to raise the funds to settle the inheritance tax charge. In turn, this would trigger a reluctance to invest in such assets in the long-term, given the knowledge that a charge to inheritance tax would ultimately arise. So for the overall good of the economy, and an overall increased tax take, these assets attract reliefs from inheritance tax.
Taking this into account, it is perhaps unlikely that APR and BPR would be removed completely. Nonetheless the report’s recommendations, if implemented by the Treasury, might lead to a tightening of these reliefs to remove perceived anomalies.
As I write this, the latest development is that David Cameron has stated the Conservatives would significantly reduce the inheritance tax charge should they win the general election in May 2015, although details are scant. Perhaps a degree of scepticism is appropriate here as some may remember that, prior to the last general election the Conservatives promised to increase the nil-rate band to £1 million; whereas of course, perhaps due to the coalition Government, they have in fact fixed it at the current £325,000 threshold.
So, what is the future for inheritance tax? No party has proposed that it be abolished and the rules for it, particularly the anti-avoidance rules, have been tightened up over the years. Inheritance tax is likely to continue as a significant, and growing, issue for many families; but the good news is that with careful planning the impact of this disliked tax can be much reduced.