Both the Guardian and the Independent carried articles earlier this week centred on the statistic that the average rate of inheritance tax (IHT) paid on the deaths of the very wealthy is 10% while the average rate on more ‘modest’ estates of between £2 million and £3 million was 20%.
I’m assuming that these averages exclude all the estates where a husband has left everything to his wife (or vice versa) which are tax free, whether the estate is £100 or £100m. Likewise, the figures take no account (as it can’t be known) of how much the very wealthy person has likely given away, IHT free, during their lifetime.
Factoring in a maximum nil rate band of £650,000 on estates worth more than £2.4 million, and with a standard rate of IHT at 40% thereafter, the expectation is that a £3 million estate would pay IHT at an average rate of around 30% and a £10 million estate at around 37%.
Both newspapers concluded, correctly, that larger estates are likely to substantially comprise assets which qualify for total relief from IHT – namely farms and businesses.
The economic, social, and political purposes of Agricultural Property Relief and Business Property Relief were the preservation of family enterprises and their value to the economy, through taxes on profits and the employment they provide for others through successive generations. The economic impact of a farm or business having to be sold (or partially sold) to meet estate taxes was to be avoided.
But can these valuable reliefs be exploited by wealthy and super–wealthy people who are not otherwise farmers or the head of a family business?
Yes, they can.
It’s entirely possible to invest your spare millions in a working farm or country estate. It’s then up to you how muddy you want to get your boots. You might employ contractors to farm the land, or go into partnership with a neighbouring farmer, or even, if you wish to detach yourself completely from any notion of hands-on farming, let the farm on a Farm Business Tenancy. Provided you’ve owned the farm for two years before your death, it should be IHT free.
Similarly, you might invest in a business, either directly or (more commonly) in shares in trading companies ‘not listed on a recognised stock exchange’ – this generally means shares listed on the Alternative Investment Market (AIM). Again, after two years these investments are IHT free.
It’s fair to say, however, that most investors in AIM shares are by no means super-rich, but rather people with more modest estates. They may be looking at a fair proportion of their estates disappearing in IHT, but where their on-going financial need prevents them sensibly giving assets away in the hope they survive the seven years to take the value given out of their estate. And where there’s a fair chance of surviving two years but not seven, investment in potentially tax-free assets might be a better planning option than making gifts.
I’m not a financial adviser. But it’s an obvious truth that tax shouldn’t be the only factor driving an investment decision. Saving tax at 40% is a poor reward if the value of your investment has completely collapsed by the time you die. And there’s a very old adage that you can make a small fortune out of farming - provided you had a large fortune to start with.
Neither am I a land agent .So I’m not alert to how many farms are being bought up by wealthy people whose aspiration to be ‘gentleman farmers’ is primarily motivated by tax , nor how the extent of that market impacts on land prices generally and the ability of young people to get into farming.
Neither am I a politician - but I, too, am going to pose two questions… without answering either of them!
If we assume that one significant reason for the seemingly perverse disparity in effective rates of IHT between larger and smaller estates is down to the availability of IHT reliefs:
- How far is the disparity in effective IHT rates down to the possibility that a sizeable proportion of very large estates are those that contain the truly ‘family’ farms and businesses that the reliefs were intended to preserve? Is the spirit of the relief still, thus, alive, well and economically relevant?
- Given the number of quality companies now listed on AIM, the markedly reduced risk of now investing in an AIM portfolio, and its solid returns, is it only a matter of time before a Government of either hue determines that a relief originally designed to match IHT relief against investment risk is no longer fit for purpose?