I have this morning published the next in my series of proposals that will make up the Taxing Wealth Report 2024.
In this latest note, I continue the theme of looking at inheritance tax. This time, I address the issues inherent in the business property relief that is provided by tax and suggest their total reform.
The summary of this note says:
This note suggests that:
- Inheritance tax business property relief currently costs £3.2 billion a year.
- The relief is open to abuse, which opportunity is well known and is advertised. Where that abuse is possible the relief should now be withdrawn.
- There is limited evidence of an economic need for this relief in other cases, although the provision of deferred payment arrangements to prevent business disruption at the time of the death of the owner of business assets is entirely appropriate.
- Payment deferral periods of up to three years might be permitted in those cases where 50% inheritance tax business property relief is provided at present.
- Payment deferral periods of up to five years might be permitted in those cases where 100% inheritance tax business property relief is provided at present, with the option for extension at the discretion of HM Revenue & Customs.
- Up to £3.2 billion of additional tax might be collected per annum over time as a result of the adoption of these recommendations.
The logic implicit in inheritance tax business property relief is that it is important that a business survive the death of its owner or owners without business disruption arising from the need to realise capital to make payment of inheritance tax. As a consequence, interests in the most illiquid of businesses are provided with 100 per cent tax relief, whilst those with greater liquidity are offered a lower 50 per cent rate of relief.
There are a number of very obvious problems with the supply of this relief on a universal basis without taking into consideration the particular circumstances of the business under review. These include:
- That in many cases there may be no significant disruption resulting from the death of the owner of a person owning assets qualifying for inheritance tax business property relief, or in raising capital to make settlement of any resulting inheritance tax liabilities. This might be most particularly true in the case of minority shareholdings. It will almost invariably be true in the case of AIM shareholdings held for the purpose of tax avoidance. This relief encourages abuse.
- That the preservation of capital amongst the heirs of those who created a business interest is not necessarily in the interests of the business itself. There are many examples where the second generation of owners of a business add no value (at best), whilst third generations frequently destroy it. The logic within this relief that the preservation of capital in a tight ownership group is beneficial has no obvious evidential support in the modern economy.
- That it is inappropriate that the owners of assets of this sort should have the opportunity to avoid inheritance tax in addition to avoiding capital gains tax on gains they might have made during their lifetime on the property in question, which charge is cancelled on death. This double taxation relief makes this relief particularly generous as well as open to abuse.
These situations all suggest that:
- The relief might be too generous.
- The relief is open to abuse.
- The assumptions underpinning the relief are inappropriate.
- An alternative is needed.
A number of recommendations flow from these observations and those in the background section:
- No relief should be provided on assets only held for investment purposes in businesses qualifying for this relief. The opportunity to obtain inheritance tax relief by buying a portfolio of AIM shares should be prevented altogether in the future. (See the note for elaboration on this point).
- Relief for the assets now subject to 50% business property relief is inappropriate. Alternative funding for these assets should always be available given suitable time to make appropriate arrangements. The possibility of making an application for the deferment of payment of inheritance tax owing for a period of up to three years should be made available in such cases, whereafter it should be payable in full. Deferment should be allowed on a case-by-case basis. This would permit time for necessary arrangements to be made without disruption to the business resulting.
- The inheritance tax due on the disposal of assets now subject to 100% inheritance tax business property relief should be deferred for a period of no more than 5 years, with extensions being permitted on a case-by-case basis. Capital gains rebasing at the time of rebasing should be permitted, but a charge should be placed over assets so that they cannot be sold without the liability to inheritance tax due being paid. Revaluation of liabilities owing to take into account changed market circumstances should only be permitted in the first two years following death.
These proposals withdraw inheritance tax business property relief altogether in cases where it is currently likely to be abused and turn it into a deferred payment arrangement in other cases to prevent the disruption that might occur by demanding payment soon after the time of death of the owner of a business or asset. The reasons for originally providing this relief are respected. The opportunity to save two taxes (i.e. both capital gains tax and inheritance tax) is, however, denied, creating much stronger vertical and horizontal tax equity as a result whilst raising £3.2 billion in additional tax revenue over time on an annual recurring basis.
Cumulative value of recommendations made
The recommendations now made as part of the Taxing Wealth Report 2024 would, taking this latest proposal into account, raise total additional tax revenues of approximately £98.2 billion per annum.