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Potential Consequences of Proposed Changes to Inheritance Tax Law in the UK

Posted on 13th May 2024 in Probate & Wills, Later Life Planning

Posted by

Naomi Hoare

Senior Associate & Solicitor
Potential Consequences of Proposed Changes to Inheritance Tax Law in the UK

In a recent comment the Institute for Fiscal Studies (IFS), a think-tank, has claimed that eliminating and/or reducing Business and Agricultural Property reliefs, tax reliefs on pension schemes, and Aim share investments would make the tax system fairer, and raise up to £2.7bn in the current tax year. However, commentators have suggested that the IFS’ calculations ignore the potentially perilous wider economic consequences of the decision and practical implications for small businesses and farmers

The proposed changes and their potential consequences 

Business and Agricultural Property Relief

Under the current law, business and agricultural reliefs can reduce the Inheritance Tax payable on qualifying assets by either 50% or 100%.

The IFS has suggested that there is a “strong economic case for completely abolishing agricultural and business reliefs” and failing this suggest a cap of £500,000 per person. 

This would mean that there would effectively be a cap on the value of farms and trading businesses, above which Inheritance Tax of 40% would be payable. The IFS claim that this cap could raise £1.4bn in the current tax year and up to 1.8bn by 2029/2030.

The key issue is that the research on which this recent report is based fails to take into account the potential consequences of caps on business and agricultural reliefs for privately and family owned businesses. Commentators have highlighted that where an unlisted business does not have the liquidity to pay the Inheritance Tax bill, the business may be forced to be wound up and its assets sold. This could lead successful family businesses and farms to be penalised, and while this could raise more revenue, it could be detrimental to the growth of businesses and farming in the UK, during already economically challenging times

Abolition of Tax-Free Pension Pots

Under current legislation, defined contribution pension pots pass free from Inheritance Tax. The IFS claim that bringing these pension pots within the scope of Inheritance Tax may raise revenue of up to £200 million per year. 

This suggestion has however received much criticism, as it may lead to fewer people paying into such pensions, and instead spending or gifting money to the next generation, which would discourage people from saving for their retirement and could increase the reliance on the state.

The removal of special treatment of AIM shares

Under the current law, AIM shares - which were previously known as investments in the Alternative Investment Market – can often qualify for 100% Business Property Relief and pass to the next generation Inheritance Tax free if these are held for more than two years before death. The IFS suggests that scrapping the tax reliefs on these shares would increase revenue by £1.1bn in the current tax year and around £1.6bn for the tax year 2029-2030. 

This however misses the rationale for the Inheritance Tax relief given to AIM shares. The AIM was launched to help small high growth companies, which may not be able to access the traditional stock market raise capital to help their expansion and increase economic growth. As these companies are often relatively small there and less regulated than in the traditional stock market, shares on AIM are generally seen as riskier. Therefore without the tax advantages, it is said that there would be little incentive for investment in these markets, which could hinder this vital source of funding for smaller companies.  

How can Tozers help?

If the above raised proposals are implemented, they could substantially increase the revenue generated by Inheritance Tax. However, as the IFS report admits, with the plethora of other Inheritance Tax saving measures, it is uncertain whether the great increases in revenue would be realised. Furthermore, the impact on the economy, small businesses, and farms could be substantial, potentially nullifying any increases in revenue by reducing the size of the economy. 

It is important to note at this stage that neither political party has commented on the IFS’ comment, however, we will continue to keep an eye on these matters as they progress and if you have any concerns about your succession plans please do not hesitate to contact us. 

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