For a tax that brings in less than 1% of Government revenues, Inheritance Tax (IHT) commands serious political and media attention. The recent sudden death of the Duke of Westminster, one of Britain’s richest men, highlighted the fact that the tax does not necessarily work as intended.
There have been a number of calls for reform from “the usual suspects”. However, the position is considerably more complex and perhaps interesting than people realise. Generally, Inheritance Tax falls disproportionately on those who do not have sufficient income to give away or whose main asset is their residential home. If the tax was mainly hitting the super-rich, Osbourne’s original promise to exempt estates worth up to £1 million would not have moved the opinion polls as sharply as they did when he made the promise. You may recall that this caused Gordon Brown to delay calling the election that he thought he might win, and the rest is history.
Of course it is not true that those who put their money in trusts avoid tax altogether. There is a 6% charge every ten years on trust assets, but what is perhaps more interesting is the substantial exemptions available for agricultural property, woodlands and unincorporated and AIM businesses. These still offer substantial opportunities for the well advised to reduce their IHT charge.
You may ask why these generous exemptions exist?
The dilemma for any Government would be that at a flat 40%, IHT is a very heavy charge, particularly when the beneficiaries do not have the liquid cash available to settle the bills. Over the years, before exemptions were introduced, IHT and its predecessors led to the export and dispersal of many works of art and indeed the loss of historic buildings. I even recall at school being told that intensive methods of agriculture which had short term benefit but long term dangers were adopted by farmers because of the view that the farm would not survive their demise. A 40% charge would have a devastating effect on family owned and small businesses which are the main generators of jobs in the UK. This is why these generous exemptions exist but they do mean that the rigour of the tax is concentrated on those with “expensive” properties in the south-east of England.
Perhaps it is time for the Government to look at a radical rethink of IHT. If the rate was cut to 20% with a compensatory reduction in reliefs, people may find it easier to stomach as well as simplifying and making the tax fairer. A number of other taxes such as Corporation Tax and Capital Gains Tax have seen this type of tax reform; perhaps it is time for IHT to have a radical overhaul.
