IHT change likely to lead to more lifetime gifts

 Inheritance tax 

Commenting on the tapering of business property relief and agricultural property relief for inheritance tax, John Barnett, Chair of CIOT’s Technical Policy and Oversight Committee, said:  

“Tapering these reliefs should enable the smallest family farms and other businesses to continue to gain substantial benefit from them while limiting the extent to which they can benefit wealthier business owners. 

“However, this change is likely to trigger an increase in the number of lifetime gifts, as all but those owning the smallest value farms and businesses scramble to avoid paying inheritance tax, though this will be less, with a 20 per cent relief on the value of qualifying assets over £1 million, than if it had been removed entirely. It will also create a lot more work with formal valuations being needed for farms and businesses worth more than £1 million. 

“This is a missed opportunity for a wider review of inheritance tax. The UK’s approach to IHT has until now been one of a high rate with a high threshold and generous reliefs. With some of the reliefs being made less generous, the time is ripe for a review of whether this balance is the best way forward.”  

On bringing pension pots into inheritance tax, John Barnett said: 

“This is an understandable move. By giving preferential treatment to pensions the current set-up incentivises those who can afford to do so to use up other assets while they are alive and leave the pension untouched. 

“This move effectively aligns pensions with other forms of investment. Transfers to a spouse will presumably be exempt; only when passing to the next generation will IHT apply. But expanding the asset base of IHT will mean more estates exceeding the £2 million threshold, at which point the residence nil-rate band is tapered away. 

“Both this change and the changes to business and agricultural reliefs will add significantly to the administrative burden on both HMRC and the executors of estates.” 

Capital gains tax 

On the increase to CGT rates John Barnett commented: 

“This is a pragmatic move. More than most taxes CGT rates have a major behavioural effect with people simply deciding not to transact if the post-tax return is too low. That – and the fact that CGT ignores the impact of inflation – is why governments have generally kept CGT rates below those for income tax. 

“Back in 2010 Treasury analysis suggested the optimum level of CGT was 28 per cent. It looks like Rachel Reeves thinks it may be a bit lower than that. Short-term behavioural effects make it hard to judge the impact of changes until some years afterwards.” 

On changes to Business Asset Disposal Relief, John Barnett commented: 

“This change will eventually reduce the value of this relief which has been much reduced since it was cut to £1 million in 2020. But, since the BADR rate remains at 10% until April 2025, while the CGT increases immediately to 24%, people selling their business can save up to 14% CGT (£140,000 per person) until April 2025 and 10% (£100,000) until April 2026. 

“One criticism of BADR has been that it is a relief that benefits entrepreneurs when they sell up rather than encouraging and supporting them at the start. Going forward we would like to see the government look at how more help can be provided to help new entrepreneurs, perhaps through additional upfront reliefs for the early years of a business. 

“It is sensible that the lifetime limit for Investors Relief has been aligned with that for BADR.”

Non-doms 

Commenting on the taxation of non-doms, John Barnett said:  

“It is pleasing that many of the recommendations previously made by CIOT when these changes were originally announced by the last government have been taken on board.  

“Changes to the 10-year new-arrival window and the tapering of the 10 year ‘tail’ (that time which someone leaving the UK remains subject to UK IHT) are to be welcomed. A consultation reviewing the settlements legislation and the Transfer of Assets Abroad rules is also very welcome; a wholesale review of these rules is long overdue.”