What does 2024 have in store for Inheritance Tax? IFA Magazine

There have been calls for a cut in the IHT rate, especially in the lead up to the 2023 Autumn Statement. Whilst there were no changes announced to IHT in the Statement, there are arguments to be made in favour of scrapping it, with the fundamental view that it is unfair to tax income throughout an individual’s lifetime, and then again after they die.

However, Katharine notes that the UK economy is in a fragile state, with government gross debt at 100.5% of gross domestic product (GDP). IHT receipts are worth £8bn to the Treasury and if IHT were to be scrapped, or receive a rate cut, the shortfall would have to be made up elsewhere. Katharine says: “This poses another significant challenge to the argument to cut IHT, because the Government currently has few options to achieve this.”

To read more on Katharine’s view of the Government’s options and the future of IHT reform, download the latest issue of the IFA Magazine here.

For more on efficient tax planning of your personal affairs, get in touch with Katharine or a member of our Private Client team.

Is scrapping Inheritance Tax right for the economy? – FT Adviser

Can IHT reform be supported?

IHT in the UK is perceived by some as overly punitive. While only a small percentage of deaths incur IHT, public sentiment views it as particularly unjust, with some advocating for its complete abolition.

However, Katharine questions whether now is the time for significant tax reform. With the UK government’s debt exceeding 100% of GDP, there are arguments to be had against any unfunded tax cuts. IHT currently generates over £8 billion annually for the Treasury, and its elimination would mean finding alternative revenue sources.

Increases to Income Tax are not seen as viable due to already high taxation levels, with the Office for Budget Responsibility (OBR) projecting a collection of £268 billion next year. As thresholds freeze, more taxpayers find themselves in higher tax bands, compounding the issue.

When it come to Capital Gains Tax (CGT), while it has been suggested that the rates should align with Income Tax, increasing CGT carries its own risks. Higher rates could discourage the sale of assets, particularly among older taxpayers who may opt to hold onto their assets instead.

What will happen now?

Despite vocal calls for IHT reform, the Treasury has not committed to any definitive plans, with only tentative suggestions of reducing and eventually abolishing IHT when financially viable. The Chancellor has underscored the lack of leeway for tax cuts. While the debate around IHT continues, the Government has not yet found a path to its reform or abolition, and the current economic climate suggests that substantial changes to the tax system might be more disruptive than beneficial.

You can read Katharine’s comments in full via FT Adviser here.

Autumn Budget 2023 analysis

The Autumn Budget will be published on 22 November 2023 and any news about IHT reform will be announced then, if it happens. Katharine, our Private Client team and our wider tax teams will analyse each announcement made to determine what these changes mean for you. To hear our latest insights following the Budget, join our mailing list to be the first to receive news as it happens.

Private Client Briefing – Inheritance Tax and Probate 2023

The Nil Rate Band (or threshold) for IHT has been frozen at £325,000 since 2009, and there are currently no plans to increase it until at least 2028. Between 2009 and 2023, the average UK house price increased by more than 80%.

None of us likes to dwell on morbid thoughts, but there’s never been a greater need to plan for IHT, as the IHT receipts for the Treasury continue to increase, and more and more families are caught by the IHT net. This IHT and probate focused briefing highlights planning principles and opportunities for you to consider. This is of course an interesting time for IHT, with recent press reports suggesting that the Government may reduce the rate in the March 2024 Budget and include the plan to abolish IHT at some future date in its 2024 election manifesto. There is no certainty at this time: we recommend that you continue to plan for IHT but retain some flexibility until we can be sure any changes and any ‘replacement’ taxes.

Our IHT and probate specialists are available to assist with your estate planning, provide you with bespoke solutions to minimise your potential IHT exposure, and to ease the administrative burdens on death by dealing with the grant of probate. Please do not hesitate to contact me or any of the Private Client team, if we can assist you in any way.

Download the Private Client Inheritance Tax Probate Briefing below.

Inheritance Tax: Business Property Relief

What is Business Property Relief?

A relief, known as Business Property Relief (BPR), reduces the value of the ‘relevant business property’ in the case of an IHT chargeable event, such as death, or the lifetime transfer of assets to a trust. Relevant business property includes:

  1. A sole trade business or a partnership share
  2. Shares in an unlisted trading company
  3. Shares in a quoted trading company where the owner has voting control of more than 50%
  4. Land, buildings, or plant and machinery owned by an individual and used by a partnership or company the individual controls.

The rate of relief that will be given is 100% for assets within classes 1 and 2 above, whereas assets within classes 3 and 4 will receive relief at 50%. Shares on the Alternative Investment Market (AIM) are treated as unlisted shares for BPR purposes, and relief is therefore available at 100%.

BPR conditions

What makes the relief so beneficial is that there is no monetary limit. Whilst BPR can be a hugely valuable relief for business owners, it can also be very easy to trip up on, due to the conditions that need to be met to qualify for the relief.

The individual must have owned the asset for at least two years at the point of the chargeable event and it must not be subject to a binding contract for sale. BPR will be restricted if the company holds ‘excepted assets’. Excepted assets are assets that are neither used for business purposes, in the two years preceding the transfer, nor required for future use in the business. An example of this would be large cash deposits which are not required for future use in the trade.

BPR will not be available if the business activity consists wholly or mainly of dealing in securities, stocks or shares, land or buildings, or making or holding investments. HMRC will look at all aspects of the business to determine if it is trading or investment, such as the business’ main activities, the assets and the sources of income. It is therefore critical for a business owner to ensure that the activities of the business comply with the conditions for relief.

HMRC will generally class ‘land-based’ businesses as investment businesses. One exception is property development businesses. The activity of dealing in land is not currently treated as relevant business property. However, a property development business constructing houses or other properties for resale should qualify for BPR.

BPR and trusts

BPR is also effective when settling relevant business property into a trust. The transfer into a trust will benefit from 100% relief (unless it is shares in a quoted trading company which carries 50% relief) and there would be no IHT charge on the way in. Similarly, the relief applies on distributions of business assets from the trust to beneficiaries once they have been held in the trust for at least two years. What makes transferring relevant business property into a trust more tax efficient, is that the donor can elect to claim gift holdover relief, which prevents the donor from suffering an immediate CGT charge on the deemed disposal of shares. The trust inherits the donor’s book cost of the shares and is then chargeable to CGT, when the trust eventually disposes of the assets. Settling business interests in a trust can be helpful with estate planning to pass on the benefit of the assets without relinquishing control.

There are many IHT planning opportunities available which involve business interests, and the potential benefits should not be overlooked. Please get in contact with the Private Client & Trusts team, or your usual haysmacintyre contact, for more information on how we can help.


Environmental Land Management and Inheritance Tax relief

Under the new ELM schemes, farmers and landowners are rewarded for farming in a sustainable way, under the Sustainable Farming Incentive (SFI). They can also be paid to support local nature recovery and the restoration of habitats, and large-scale tree planting.

Whilst farming land in an environmentally sustainable way should continue to attract 100% Agricultural Property Relief (APR) for Inheritance Tax (IHT) purposes, there is a concern that where land is taken out of agricultural production for the recovery of plants, wildlife and habitat protection, the qualifying conditions for claiming APR will not be met. Under current legislation, where land has not been owned and occupied for agricultural purposes immediately before it is transferred, relief is not available. Whilst farmers and landowners may, in certain circumstances, still qualify for Business Property Relief, the inability to claim APR could be a real barrier for farmers and landowners making long term commitments to take land out of agricultural production.

The Government has listened to concerns and has published a consultation document entitled ‘Taxation of environmental land management and ecosystem service markets’. The consultation is a call for evidence on how the tax system can better encourage private investment in ecosystem service markets (production and sale of carbon credits and biodiversity units), and a call for evidence to support a reform of APR, to include relief for land managed for environmental purposes under an environmental scheme.

The Government has made it clear that any reforms of APR will not benefit from land that did not previously qualify for relief. This could be an issue for farmers who have already diversified away from agricultural land use.

The Government’s review is welcome, as there has to date been little guidance from HMRC on the tax implications that the increasing number of environmental schemes can have, for farmers and landowners. In light of the Government’s ambition for net zero by 2050, we expect to see the introduction of further sustainability tax measures that encourage farmers and landowners to not only produce the food we need, but also to protect and enhance our natural environment.

If you have any questions regarding APR and the potential reforms, please get in touch with Kay Mind, Director. The consultation closes shortly, and we will provide further commentary when the Government publishes the results.

This article has been taken from our Private Client Summer Briefing 2023. Click here to read more.

Inheritance Tax: Charitable donations

An often-overlooked subject in relation to tax is the relief available on qualifying charitable Gift Aid donations. Gift Aid payments are made net of 20% basic rate tax. If you wish for a charity to receive a total of £1,000, a physical payment of £800 is required. The charity will then claim back the £200 from HMRC. For basic rate taxpayers, no further adjustment is required, however for higher and additional rate taxpayers, an adjustment is required via the tax return. The tax relief is obtained via the extension of the basic rate band, by the gross charitable donation made, meaning more income is subject to tax at the lower rates.

Any charitable donations made in the current tax year prior to the submission of your tax return can also be carried back to the previous year to accelerate any tax relief. This can be particularly beneficial as there is an interaction between Gift Aid payments and the calculation of your Personal Allowance (your personal allowance tapers by £1 for every £2 you earn over £100,000). For example, an individual with a gross income of £101,000 could make a £800 (net) charitable donation and carry this back. This would mean that they have a reinstated Personal Allowance and have reduced their tax liability by £400. The net cost to the taxpayer would be £400 (£800 cost less £400 saving), however, the charity would benefit from the £1,000 donation (£800 paid plus £200 from HMRC).

In addition to Gift Aid donations, individuals can give shares in quoted companies on a recognised stock exchange to a charity. The gross value of the shares, on the date of the gift, is treated as a deductible payment for Income Tax purposes. No further adjustments are required to the tax computation, or the tax rate bands as above. A gift of shares worth £800 would result in an Income Tax saving of £480, meaning a net cost of £320 to the individual. Please note, in this case the charity would not receive the additional £200 as no ‘Gift Aid’ can be claimed from HMRC on an outright gift. This can be especially useful if you have an asset which, if disposed of on an open market, would result in a CGT liability. When making a transfer of assets to a charity, it is not a taxable event for CGT purposes, increasing any further tax savings.

Budget 2023 included an update to the tax relief on EEA/EU charitable donations. Previously, donations to charities located in the EEA/ EU would qualify for Gift Aid, following the principles explained above. However, to obtain tax relief on donations made after 15 March 2023 (subject to a very few charities which have asserted their UK charitable status), it will be restricted to UK charities only. This change is not just relevant for Income Tax purposes but could also affect your Inheritance Tax (IHT) exposure. If you have any specific donations in your will to overseas charities, please contact Duncan Cleary, or our Private Client team, to ensure that the charity (or charities) will qualify for IHT relief under the new definition.

This article has been taken from our Private Client Summer Briefing 2023. Click here to read more.

Record Inheritance Tax receipts in 2023

The Government’s decision to freeze the IHT threshold has led to more families being dragged into the IHT net. The IHT threshold of £325,000 has not increased since 2009, while the average UK house price increased by more than 80% between 2009 and early 2023. The announcement in the 2022 Autumn Statement to freeze the IHT threshold until April 2028, will see the Government collect billions in extra tax that would not be possible if the nil rate band had increased with inflation.

While there have been calls for the abolition of IHT, it is unlikely that the Treasury would be willing to forfeit £7bn a year in receipts, which helps to fund our public services, without a viable alternative. We may see some IHT reforms, but scrapping the tax altogether would leave a sizeable hole in the Treasury budget, presumably needing to be filled by increases in other taxes.

In our opinion, given the current state of the UK economy, IHT is here to stay. Therefore, lifetime planning remains key if you wish to minimise the tax you pay to the Treasury and maximise the family wealth you pass on to the next generation.

IHT planning can include lifetime giving, charitable giving, gifting surplus income or setting up a family trust or investment company. Maximising IHT allowances and reliefs also plays a part in reducing your exposure.

Our IHT specialists are on hand to assist you with your estate planning and provide you with bespoke solutions to minimise your potential IHT exposure.

For a full list of our IHT planning services, please download our factsheet here and contact Kay Mind, Director, for any further assistance.

Get in touch