Earlier this week, the Institute for Fiscal Studies (‘IFS’) suggested that a way to raise revenues and make the tax system ‘fairer’ may be to restrict three types of relief from Inheritance Tax and to no longer give ‘special treatment to some assets’.
Firstly, the IFS says that the government should target Business Property Relief (‘BPR’) on shares listed on the Alternative Investment Market (AIM). Currently, qualifying AIM listed shares held for a minimum period of two years before death will qualify for 100% relief from Inheritance Tax. The IFS states that the relief ‘distorts investment choices’ for older people particularly, who wouldn’t otherwise choose to invest. Whilst the IFS estimate that the removal of this relief may raise £1.1bn in the current tax year, it is possible that without any tax advantage for these types of shares, the AIM market may see a decline in investors as a result. For a lot of people who are not risk-averse, this is a common investment strategy recommended by financial advisors.
The IFS also says that there should be a consideration to either cap or eliminate Business Property Relief (‘BPR’) and Agricultural Property Relief (‘APR’) entirely. This is on the basis that these tax reliefs have ‘substantial revenue costs’.
BPR reduces the value of a business or its assets (to include property and buildings, unlisted shares, and machinery). There are several requirements in order to qualify for BPR, generally speaking you can currently get BPR at a rate of either 50% or 100% of the asset value provided that the deceased owned the asset for a minimum period of two years before death. BPR would not be applicable if a company mainly deals with securities, stocks or shares, land or buildings or in making or holding investments.
APR allows you to pass on agricultural land or property used for growing crops or rearing animals free of Inheritance Tax. To qualify for the relief, the land or property must have been owned and occupied for agricultural purposes for a minimum period of either two years if occupied by the owner or seven years if occupied by someone else. Farmhouses and cottages may be eligible for the relief if of a nature and size appropriate to the farming activity. The relief is again either 50% or 100% as with BPR.
The obvious foreseeable effect of restricting either BPR or APR is that successful family businesses or farms would be detrimentally affected, and a sale may be forced to enable any Inheritance Tax to be paid. This seems to contrast with HMRC’s longstanding views on the importance of BPR and APR in encouraging businesses and/or farming as a way to support and grow the economy.
Lastly, the IFS suggests ending the tax-free inheritance of pension pots. Currently, defined contribution pension pots can be passed on tax-free, and people are therefore encouraged by tax advisors to use their pension as a way of passing assets down a generation tax free. The IFS argues that this is ‘unfair’ and they should be brought into the scope of Inheritance Tax but such drastic action could discourage people from saving for their retirement.
It appears that the IFS has considered a short-term increase in revenue, but the report does not consider the longer-term effects on the economy.
Please contact Rebecca Littlewood at [javascript protected email address] or 01908 247246 to ask for more information on this subject.
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