Inheritance tax 'in the crosshairs' for reform

Inheritance tax 'in the crosshairs' for reform

Inheritance tax could be targeted for reform as HM Revenue & Customs publishes research into how the exemptions are used by advisers and their clients.

The research, published yesterday alongside the Budget, found most of the beneficiaries and testators interviewed had a "limited" understanding of how IHT worked and few were aware of exemptions such as business property relief (BPR) and agricultural property relief.

Many advisers said their clients held misconceptions about how the reliefs would apply to their estate. For example, many assumed all agricultural or business assets qualify for 100 per cent IHT relief, which was attributed to clients having learnt about the relief by "word-of-mouth".

The research found the main reason these exemptions were used was to keep an estate whole and to pass it on to a family member on death.

The report said: "Three factors - tradition, the succession of wealth and the preservation of a business – generally underpinned these objectives.

"Many said that reducing the IHT payable on their estate was a secondary consideration; usually in the context of supporting these objectives.

"It was the case for all three audiences interviewed - testators, beneficiaries and agents remarking on clients’ behaviour - that assets were rarely purchased specifically to make use of APR/BPR."

Many business owners told HMRC they would have to sell their business to cover their IHT bill if the BPR exemption was not available.

Advisers mentioned that some clients had purchased shares in the Alternative Investment Market or in the Enterprise Investment Scheme to reduce the IHT payable on their estate but many said this was a risky investment they would not typically advise. Generally, the research found this was uncommon.

Rachael Griffin, tax and financial planning expert at Old Mutual Wealth, said the report suggested IHT was "in the crosshairs" for future reform.

She said: "The IHT system is not straightforward and has a number of legacy clauses and exemptions that government may seek to reform.

"HMRC’s research focussed on business property relief and agricultural property relief, likely seeking to see if the allowances were being misused.

"However, the report notes the majority of people are using the exemptions as they are supposed to be used, to allow them to keep the business or farm in the family, without having to break it up or sell some or all of the assets to pay an inheritance tax bill."

This is not the first time in recent weeks that a government agency has suggested IHT was in need of reform.

Last month the Office for Tax Simplification published its plan for the year ahead and said it would start work on a review of IHT.

Yesterday's Budget revealed inheritance tax receipts will continue to grow beyond their current record levels in the coming years despite measures to cut people's bills.

HM Treasury predicts it will raise £5.3bn in 2017 to 2018, which will eventually increase to £6.5bn by 2022 to 2023.