See the full report here.
17 October 2024 – A quarter of estates worth over £10 million pay less than 9% Inheritance Tax, thanks to uncapped exemptions and reliefs.
One in six estates worth over £10 million currently pay an effective tax rate of less than 4%, even among estates not eligible for the (uncapped) spouse exemption, whilst another quarter pay close to the 40% headline rate of Inheritance Tax (IHT). These huge disparities are driven by the use of allowances, exemptions and reliefs, including Business Relief, Agricultural Relief.
These findings come from a new report by researchers at the Centre for Analysis of Taxation (CenTax), published on the day Parliament meets for a Westminster Hall Debate on the future of Business Relief and Agricultural Relief, and amidst speculation that these reliefs might be a target for the Chancellor in the upcoming Budget.
The report finds that:
- On average, Business Relief almost halves the effective tax rate paid by estates worth over £30 million (from 23% to 12%), compared with only a one percentage point reduction for estates valued at less than £1.5 million. More than two thirds of Business Relief goes to around 400 estates per year claiming more than £1 million each in relief.
- Only a quarter of those claiming Business Relief on shares had been involved in management of a business as a company director at any point in the five tax years prior to death. This suggests that most claims for Business Relief are by ‘passive’ investors rather than ‘active’ business owners. This figure includes investments in AIM shares.
- Almost two thirds (64%) of Agricultural Relief went to around 200 estates per year that each claimed more than £1 million in relief, with an average estate value of £6 million.
- Agricultural Relief can be claimed by landlords as well as active farmers, provided that they have owned the land for at least seven years. Less than half (44%) of individuals who claimed Agricultural Relief had received any trading income from agriculture at any point in the five tax years prior to death. Income from agriculture made up less than a quarter of their income.
The report recommends a series of reforms aimed at making IHT fairer whilst preserving the key policy objectives of existing exemptions and reliefs:
- Capping Agricultural Relief and Business Relief at a combined limit of £500,000 per estate could raise up to £900 million per year. Two-thirds of estates claiming Agricultural Relief, and three-quarters of those claiming Business Relief, would be completely unaffected, but would increase the effective tax rates paid by the very largest estates (above £30 million) by around 7pp on average.
- Abolishing the Residential Nil Rate Band (RNRB) whilst increasing the standard Nil Rate Band (NRB) by an equivalent amount would cost around £1 billion per year, with all of the benefit going to estates valued at less than £2.7 million. For estates valued at less than £2 million, this would entail an increase in the NRB from £325,000 to £500,000.
- Capping the spouse exemption at £10 million would affect fewer than 0.1% of estates (100 deaths a year) and raise up to £350m in revenue. This reform would limit the current scope for tax planning, whilst ensuring that surviving spouses would not suffer a material reduction in living standards as a result of IHT.
- Combining all three of these reforms could raise up to £500 million, whilst at the same time lowering effective tax rates (on average) for estates worth less than £2 million. Under this package, only estates worth more than £8 million would see their effective tax rates rise by more than 5 percentage points on average.
Andy Summers, Director of CenTax and Associate Professor at LSE, said:
“Ideally, the UK would look to international examples and consider wholesale reform of our broken Inheritance Tax system. Clearly that’s not feasible in time for this Budget, but our report shows how the Government could raise revenues at the same time as cutting effective tax rates for most estates, just by limiting some of the excesses of our existing exemptions and reliefs.”
Arun Advani, Director of CenTax and Associate Professor at University of Warwick, said: “Less than one in five Business Relief claims are for someone who was managing a closely-held business any time in the five years prior to death. Although Business Relief is often defended as protection for family businesses, it is poorly targeted for doing that, as well as being very expensive.”
James Forrester, Research Economist at CenTax, said:
“It’s striking how much the effective tax rate varies among estates with similar amounts of wealth. This is driven by a number of different tax reliefs, but much of the benefit of these reliefs is concentrated among relatively few estates.”
ENDS
Notes to editors
- CenTax Policy Report Inheritance Tax reliefs: time for reform? by Arun Advani, Franziska Disslbacher, James Forrester and Andy Summers will be published at 0.01 on Thursday 17 October 2024 on the following link: https://centax.org.uk/inheritance-tax-reliefs-time-for-reform/
Embargoed copies of the report are available from:
press@centax.org.uk - The Centre for Analysis of Taxation (CenTax) is a new centre dedicated to improving public understanding of tax policy and helping to design better a better tax system, by generating evidence that is rigorous and relevant to policymakers and the public. CenTax is led by Dr Arun Advani (University of Warwick) and Dr Andy Summers (LSE).
- The researchers used de-identified Inheritance Tax and Self-Assessment tax records accessed via the HMRC Datalab. The work contains statistical data from HMRC which are Crown Copyright. The research data sets used may not exactly reproduce HMRC aggregates. The use of HMRC statistical data in this work does not imply the endorsement of HMRC in relation to the interpretation or analysis of the information.
- The analysis of effective tax rates does not account for ‘missing wealth’, such as lifetime gifts made more than seven years before death, assets transferred into trusts, or other assets that are exempt from IHT altogether (such as the foreign assets of ‘non-doms’). Including these assets, effective tax rates would be lower.
- This research was funded by funded by the Nuffield Foundation grant ‘Broad Shoulders’ (WEL/FR-000023787) and the Economic and Social Research Council (ESRC) grant ‘Taxing the Super Rich’ (ES/W012650/1). CenTax receives core funding from abrdn Financial Fairness Trust and the Thirty Percy Foundation.