The inheritance tax and capital gains tax regimes interact. This means that, when a person dies, the deductible value of their assets for CGT purposes is reassessed on death.
This avoids IHT and CGT being paid twice, as IHT is paid on asset value up to date of death and CGT is only paid on the increase in value between death and any subsequent sale of the asset.
If IHT was abolished, there would be no continuing justification for assets to be revalued for CGT purposes on death.
Thus, even though IHT may no longer be payable, the CGT charge when an asset is sold is likely to substantially increase. This will act as a disincentive to sell real estate following a person’s death and would remove some liquidity from the property market.
Many Aim investments are made as, after two years of ownership, the shares held are entitled to full relief from IHT. If the IHT benefit is no longer relevant, investors will move their money into lower risk investments, which could cause many companies on the Aim to lose their value.
Similarly, agricultural land has been bought by the wealthy as land benefits from a IHT relief similar to that applicable to Aim shares.
This relief has been criticised for forcing the price of this type of land to increase in value so that genuine farmers are unable to afford the land they need to make a living.
Without IHT relief investors may choose different asset classes, causing land values to fall.
IHT motivates older generations to make gifts to their children or grandchildren, as giving wealth away was the simplest form of IHT planning.
Without this motivation wealth may be hoarded, with a knock-on effect for children wishing to use the bank of mum and dad to get on the property ladder.
Trusts have lost their popularity as the IHT implications of moving assets into trusts can make them costly to run. Without this IHT downside, trusts will become more popular again as a means by which families can control their wealth and protect it from claims in, for example, matrimonial disputes.
Many people use life insurance to cover their IHT liability. A whole-of-life policy that pays out on the second death of a married couple is one way to ensure that the IHT bill is met and the family wealth passes intact to the next generation.
If IHT is abolished, the demand for this type of life policy will disappear. This will have a knock-on effect on the pricing of life insurance for other purposes.
Overseas nationals who move to the UK to live and work will often consider leaving the country before they become subject to UK IHT on their worldwide assets, generally after 15 years of being a UK tax resident.
If there is no IHT, this will make the UK a more attractive destination for wealthy overseas individuals.
Families are often frustrated with the time it takes to work through the probate process and release assets to beneficiaries.
If there was no IHT due, the probate process should be dramatically speeded up, allowing families to redistribute assets more quickly following the death of a loved one.
Tim Stovold is head of tax at Moore Kingston Smith.
