The government must reform the UK’s “broken inheritance tax system”, a respected think tank has urged, after fresh research found uncapped exemptions in the current framework means a quarter of estates worth over £10m pay a rate of just nine per cent.
The Centre for Analysis of Taxation (CenTax) paper, published on Thursday, revealed the extent to which allowances to the tax such as Business Relief and Agricultural Relief are leading to vast discrepancies in the amount of inheritance tax (IHT) families pay.
One in six estates worth over £10m pay an effective tax rate of less than four per cent, the research found, while a quarter pay close to the 40 per cent headline rate of IHT.
Business Relief, an exemption that allows families to pass down family businesses without having to dissolve the firm, almost halves the effective tax rate paid by estates worth over £30m, the authors said. Meanwhile, just a quarter of those claiming the relief were found to be involved in managing the business at any point in the five years before dying, the intended target of the provision.
Arun Advani, associate professor at the University of Warwick, said: “Less than one in five Business Relief claims are for someone who was managing a closely-held business any time in the five years prior to death. Although Business Relief is often defended as protection for family businesses, it is poorly targeted for doing that, as well as being very expensive.”
The paper also reveals the extent of inheritance tax avoidance via the Agricultural Relief scheme, a similar allowance which permits estates to pass down land used for agricultural purposes free from from IHT.
Almost two thirds of Agricultural Relief went to around 200 estates per year that each claimed more than £1m in relief. And because the relief can be claimed by landlords as well as active farmers, the study found that less than half of individuals claiming it had any trading income from agriculture at any point in the five years prior to death.
“Ideally, the UK would look to international examples and consider wholesale reform of our broken Inheritance Tax system,” said Andy Summers, Associate Professor at London School of Economics. “Clearly that’s not feasible in time for this Budget, but our report shows how the Government could raise revenues at the same time as cutting effective tax rates for most estates, just by limiting some of the excesses of our existing exemptions and reliefs.”
The study, called Inheritance Tax reliefs: time for reform, proposes capping both Agricultural and Business relief to a combined limit of £500,000, among other changes, in a move which could raise £900m a year.
But the changes to Business Relief specifically drew criticism from Family Business UK (FBUK), an industry body for family businesses.
“Family businesses inherently take a long-term view to growth. They are invested in their employees, local economy and communities for generations,” FBUK chief executive Neil Davy told City AM.
“Business Property Relief (or ‘BPR’) is a policy that successive governments have supported and protected for over 50 years. It allows owners of the business to pass it the next generation without punitive taxes, which other models of business ownership are not subject to.
“Without BPR, capital would need to be withheld to pay the additional tax. That’s money that would otherwise be invested in new jobs, skills training, R&D and new technologies.”
The calls come amid intense speculation that Rachel Reeves may reform inheritance tax, widely viewed as one of the least popular taxes among voters, at the upcoming Budget, and will give weight to earlier calls for reform from the likes of Demos and the Institute for Fiscal Studies (IFS).
The authors also advocate for the removal of relief on investment in London’s junior market, AIM, something which City figures have previously warned would make it even harder for AIM-listed companies to attract investment.