The Institute for Financial Studies issued a briefing note on 5 January 2017 entitled “Inheritances and inequality across and within generations”.

The note identifies that today’s elderly have more to bequeath than their predecessors, due to rising house prices, and that it will be more difficult for today’s young adults to accumulate wealth of their own due to a variety of economic factors.  The conclusion drawn is that inherited wealth will play an increasingly important role in the lifetime resources of younger generations.

The note goes on to point out the implications of this for social mobility – current pensioners with the highest lifetime incomes are also those who have inherited most in the course of their lives.  87% of people born in the 1970s and in the top income quintile expected to receive an inheritance, compared to 58% in the bottom income quintile.

This led to a discussion by Paul Johnson, the IFS director, on Inheritance Tax.  In the absence of any planning or reliefs, Inheritance Tax will of course reduce any wealth being passed down a generation on death by 40%.  He stated that on Inheritance Tax “there are some really absurdly obvious loopholes in it that one might want to sort out”.  In their Green Budget in 2015, the IFS proposed the abolition of Business and Agricultural Property Relief, as well as the lengthening of the period in which a gift will be a Potentially Exempt Transfer from 7 to 15 years.

Business Property Relief (BPR)

BPR and its farming cousin Agricultural Property Relief (‘APR’) provide an exemption from IHT for certain assets.  The main focus for entrepreneurs is that shares in an unlisted company will generally be exempt from IHT.  It is easy to point out a certain inequity in this.

Mr Smith owns a window manufacturing company (having found the widget manufacturing market to be crowded out, he moved on to the next item in the dictionary).  The company is worth £10m, and he is close to concluding a sale for this amount.  Mr Smith is fatally killed in a freak accident by a falling meteorite (he doesn’t live near a bus route).  No Inheritance Tax is paid in relation to his shares, and his daughter to whom he leaves the shares completes the share sale the following day.  No capital gains tax is due as her base cost in the shares is market value on the date of her father’s death.

In an alternate reality, Mr Smith narrowly avoids the meteor and completes the sale.  Capital gains tax of c.£1m is payable.  The next day, giddy with his new found fortune, he goes bungee jumping and is run over by a bus on the way home.  Inheritance tax is payable on the £9m of cash which he leaves to his daughter at 40%.  The date of signing of the deal has reduced the amount inherited from £10m to £5.4m.

The tax rules are functioning here to encourage entrepreneurs to retain their shares until death if they wish to optimise the tax position.  This does not seem either fiscally or socially healthy.  However, it is arguable that what is unfair is the existence of the tax and not the existence of the relief.

Inheritance Tax Planning

Mr Johnson also noted that “The problem with inheritance tax is that it is very hard to make it work for the really wealthy. It is the middlingly wealthy who end up paying it because it is pretty easy, if you can give money away during your life, or use trusts and so on, for people who have got serious money not to pay the full 40%”

The key here is that Inheritance Tax is a tax where planning opportunities continue to exist, and not exclusively for the very wealthy.  Planning need not be expensive, certainly compared to the 40% tax burden which will arise in its absence.  We would advise the “middlingly wealthy” to be engaged in a discussion with a tax specialist on how they can seek to legitimately minimise the loss of wealth to future generations of their family.

If you want to discuss any of the points raised in this blog please get in touch with me here, or:

0141 886 6644
craig.coyle@campbelldallas.co.uk

The information in this blog should not be regarded as financial advice.  This is based on our understanding in January 2017. Laws and tax rules may change in the future.