Tax Efficient Digest – 10 September 2018

A version of this article was published in FT Adviser.

If you were to describe inheritance tax (IHT) in one word, what would that word be? Unpopular, unfair, complex, detested…?

Dubbed Britain’s most hated tax, it’s currently paid by one in 20 people in the UK, but that figure is expected to rise to one in ten in the not too distant future.

Raising £5.2 billion in the last tax year (8% more than the previous year), it’s unlikely this tax will ever be abolished in the UK. However, considering IHT is frequently blamed for distorting individuals’ investment decisions, change is long overdue.

Thus, it came as little surprise when Philip Hammond announced a review of IHT earlier this year. In his spring statement, Hammond declared the need for simpler rules surrounding IHT, and experts have been recommending aspects of the tax in need of reform ever since.

Why IHT is under review

IHT was once a relatively uncontroversial tax, as it affected a very small proportion of the population. But with the inexorable rise in property values in recent decades, more and more people have been dragged into the IHT net. Also, previous chancellors have cynically frozen the threshold in order to widen the net and increase the tax take. So, not only has it become a big earner for the Chancellor, but it has also become steadily more unpopular.

Attempts to simplify IHT or make it appear more reasonable have in general failed. The introduction of RNRB (residence nil rate band) a couple of years ago was supposed to make IHT fairer, but it was phased in over a number of years, which has had a dilutive effect and merely served to add to the complication of calculating the level of tax owed, and not satisfied anyone.

The Chancellor is doubtless aware of the growing unpopularity and disenchantment with IHT and has committed to having a stab at making it simpler and easier to understand. He clearly senses a political advantage if he is successful in the reforms he makes, so, as ever, this is as much about politics as economics.

What are the possible outcomes of the IHT review?

It’s hard to predict precisely what will change as a result of the IHT review, but we can take an educated guess.

I think the chancellor will focus on IHT simplification and increasing the tax take in the changes he may announce later this year. Examples of simplification may mean changes to exemptions such as increasing the annual allowance for gifts from its derisory low amount of £3,000 to something that may combine all gift allowances into a single annual allowance of say £10,000. In addition, I foresee a simplified residence nil-rate band (RNRB) so that it can be utilised outside of the current situation, where people must leave their estate to direct descendants. Alternatively, we could see RNRB simply removed altogether and the flat rate threshold increased to £500,000.

Controversial changes and examples of where he could increase the IHT tax take may be tinkering with Business Relief (BR). Such as the removal of AIM shares qualifying for BR, the extension of the 2 year qualifying holding period to 5 years and a review of qualification of unquoted company shares whereby certain trades are excluded or the relief is removed altogether or attracts a reduced rate (rather than 0%) of inheritance tax.

Until we know exactly what changes lie ahead, there are things you can do to fine-tune your investment portfolio. For example, you can make adjustments so your investments take advantage of business relief (BR). You can also ensure your investments are as diversified as possible to minimise risk.

Understanding the full range of options open to investors is a crucial part of the investment process. For more information about our open investments or to discuss in more detail, get in touch with the team today.

EISChristian Elmes, Partner

Christian Elmes trained at PwC and qualified as a chartered accountant in 1999, before moving to Morgan Stanley (2000-2002) as Associate in the Investment Banking Division (IBD).

He was appointed Director of Finance, Teather & Greenwood Investment Management in 2002 and moved with the Tax Efficient Solutions team to Smith & Williamson in 2004, becoming Deputy head of the department. He left to co-found Enterprise in 2011.

Over the last ten years, Christian has been responsible for developing a number of tax efficient products, particularly Enterprise Investment Schemes (EIS). He is able to lead on tax efficient product development from inception through to completion, because of his financial and tax background and commercial experience.

Christian is competent across a broad range of sectors including, leisure and hospitality, media, property and renewable energy.

Christian is a non-executive board member to a number of leisure and hospitality companies, Casper & Cole Ltd, Wright & Bell Ltd, Ruth & Robinson Ltd, Camm & Hooper Ltd and Darwin & Wallace Ltd.

 

 


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