Inheritance tax reliefs could be under the Labour spotlight

05 July 2024

Few chancellors find themselves entering office and immediately having to wrestle the Houdini act of managing the country’s finances whilst being chained by pledges not to increase National Insurance contributions; the basic, higher, or additional rates of income tax; VAT or the main rate of corporation tax. Whilst the manifesto plans have been costed, the question remains as to how the government will raise the funds needed to cover public spending if economic growth is not immediately forthcoming? One suggested solution is to increase inheritance tax (IHT) receipts. 

There has been a lot of chatter over the possibility of completely abolishing certain inheritance tax reliefs such as agricultural relief and business relief (BR), or potentially capping the relief at £500,000 per person. We have discussed the measure and its potential implications in a previous weekly tax brief article, but in short, reducing the relief to £500,000 per person would effectively place a cap on the value of trading businesses, above which point inheritance tax could potentially be charged at a rate of 40%. 

Such a measure could create ripple effects in the economy if estates of larger unlisted businesses were left with significant IHT liabilities and a lack of liquid assets to cover them, thus potentially pushing them to wind up the business and sell the assets, which may lead to further tax liabilities and professional fees. As a result, we are already seeing business owners starting to think about ways of minimising the potentially significant tax impact of a BR cap on their family businesses and other trading companies. 

For example, business owners worried about a potential IHT bill are exploring whether they should bank BR by gifting shares into a trust before any changes are made. Whilst that might sound relatively straightforward on the surface, there are multiple risks associated with such planning. For example, there could still be a potential charge to IHT if the individual making the gift dies within seven years of the gift. Any future changes to BR could be accompanied by rules that make gifts to trusts less effective for IHT purposes and there may also be ongoing IHT charges in trusts. In addition, there are wider tax anti-avoidance provisions, such as the general anti-abuse rule (GAAR), that should be considered if any steps are taken by taxpayers that could be seen as abusive.

There is also the question of whether it is the right time to make a gift of an asset to someone else. For those that remain unsure, they could consider the option of gifting ‘growth shares’ in their company. Growth share planning can potentially allow for the future growth in value of a business to fall within the estate of another person, such as a family member. That could mitigate the IHT exposure as it effectively transfers the tax burden to the next generation. 

Similarly, parents in a family business company could also explore whether they can sell their shares to their children. Depending on the structure of such a sale, it may be sensible to seek advance approval from HMRC to ensure wider income tax anti-avoidance provisions do not apply. 

Whilst there is plenty of speculation, it is important that business owners do not rush into decisions for the wrong reasons that they could regret later. Slightly ironically, a final answer to limiting someone’s IHT exposure may come from Labour’s policy on non-doms, as the proposed changes to a residence based IHT regime could open the door to IHT savings for expats who have become a long-term tax resident overseas.

Miruna Constantin
Manager, Private Client Services
AUTHOR
Miruna Constantin
Manager, Private Client Services
AUTHOR