Reform of inheritance tax | ICAEW
Freezing inheritance tax thresholds was not widely anticipated until the spring 2021 budget. Lindsey Wicks examines how this move will affect post-pandemic government revenues and social mobility, and reviews reports on estate taxation and the capital of the Institute for Fiscal Studies, the Treasury Select Committee and the OECD.
The zero rate inheritance tax (IHT) tranche has been at its current level of £ 325,000 since April 6, 2009. Following the announcement of a freeze on a number of tax thresholds in the budget 2021, the NRB is expected to remain at this level until at least April 5, 2026. The Zero Residential Rate Band (RNRB) has increased by £ 25,000 each year since its introduction on April 6, 2017. Fitting currently at £ 175,000 the GNR, along with its taper threshold of £ 2million, were both due to start rising each year based on CPI inflation from 2021/2022, but are now frozen until April 5, 2026.
The rationale for freezing allowances is quite clear. The government must increase tax revenues to recover costs related to the coronavirus pandemic. Table 2.1 of the 2021 budget reveals that the freezing of these thresholds is estimated at £ 985 million over the period up to 2025/2026. But how many more areas will fall into the IHT’s net?
Number of domains submitted to the IHT
The latest statistics, released in December 2020, show that in 2017/18 only 3.9% of UK deaths resulted in an IHT charge. The 2016/17 figure was 4.6% and the 0.7% reduction is attributed to the introduction of the RNRB.
The all-time high was 5.9% in 2006/07. Following this climax, there was a decrease in the proportion of UK deaths subject to IHT followed by IHT receipts. This is due to the combined effects of the introduction of the transferable NRB in October 2007 and the decline in asset values following the 2008 financial crisis. However, the figures again increased steadily until the reduction in 2017/18 .
Asset values and composition of the estate
The data also shows that over the period 2009/10 to 2017/18, the gross equity value of domains increased from around £ 35bn to £ 100bn, with 58% of that increase attributable to to residential real estate.
And we know that house prices continue to rise. The latest house price data show that (with the exception of Northern Ireland) average house prices have more than recovered from the 2008 financial crisis. All countries in the UK continue to see a decline. upward trend in prices.
The UK average home price of £ 250,341 in February 2021 reveals that many homes are still unlikely to fall into the IHT net if the home attracts GNI and the value of other assets is low. However, at £ 496,000 as of December 2020, the average house in London alone is on the verge of being submitted to the IHT if the estate cannot qualify for transferable allowances.
Historical data shows that when the estate’s equity is less than £ 1million, the estates mostly consist of residential property and cash. Above this limit, estates are more likely to consist of title and other assets, attracting reliefs such as Farm Ownership Relief (APR) and Commercial Property Relief (BPR) .
The fact that higher value estates have a lower effective tax rate because they are covered by relief was also highlighted by the Office of Tax Simplification (OTS) in the first report of its IHT review. Based on data from HMRC 2015/16, it found that on average 70% of the value of an estate worth over £ 10million is lightened in this way.
Social mobility and attitudes towards inheritance
A report published in April 2021 by the Institute for Fiscal Studies, Inheritances and Inequality Over the Life Cycle: What Will They Mean for Younger Generations ?, notes that inheritances have increased as a proportion of national income in the UK since the 1970s. The main conclusions of the report are as follows:
- inheritances are likely to be larger relative to lifetime income for younger generations than for their predecessors (projected at 9% of household income for those born in the 1960s, rising to 16% for those born in the 1960s). 80);
- while inheritances are expected to be larger for those with higher incomes, inheritances as a percentage of lifetime income appear likely to be similar, on average, for low- and high-income households;
- inheritance is called upon to play an increasingly important role in increasing inequalities between those whose parents are the richest and the poorest, thus reducing social mobility;
- while inheritances are likely to have their greatest effect on standard of living later in life, once they are received, the anticipation of future inheritances can affect outcomes today;
- since those with higher incomes are more likely to be able or willing to reduce the amount they save for inheritance, they are likely to see a greater effect on their standard of living today; and
- growing inheritances means that policies that succeed in redistributing them would have greater effects on inequalities and social mobility for future generations.
Even if the proportion of domains subject to IHT increases due to the freezing of IHT tranches, this policy alone is unlikely to have a significant effect on inequalities and social mobility. Since higher-value estates have more assets benefiting from BPR and APR, the band freeze combined with rising house prices means the effect is more likely to be felt by those who move away. are lower in the distribution of wealth.
The Organization for Economic Co-operation and Development (OECD) has also looked into this issue. Inheritance Taxation in OECD Countries, published May 11, 2021, provides a comparative assessment of inheritance taxation in OECD countries and explores the role that inheritance, inheritance and gift taxes could play to increase incomes, fight inequalities and improve efficiency in the future.
Will the IHT be substantially reformed?
Forecasts before the 2021 budget put the reform of the IHT at the top of the list. In its report, Tax after Coronavirus, released on March 1, 2021, the Treasury Select Committee stated that, “Based on the evidence presented to the Committee, we believe there is a compelling case for tax reform. on capital. The committee said it looked forward to the government’s response to the OTS reports on the IHT and the capital gains tax.
To date, the only OTS IHT reporting announcement has been for a welcome reduction in IHT reporting requirements to take effect from January 1, 2022. Announced on Tax Day on March 23, 2021, reporting regulations will be streamlined later this year with the aim to ensure that 90% of tax-free estates each year no longer have to complete IHT forms when probate or confirmation is required. However, even this falls short of key recommendations from the OTS’s first IHT report recommending that the government implement a fully integrated digital system for the IHT.
The recent OECD report points out that the COVID-19 crisis is likely to put countries under increased pressure to increase their incomes and tackle inequality. The report considers that well-designed inheritance taxes can increase revenue and improve equity at lower efficiency and administrative costs than other alternatives. It also suggests ways to help overcome the political obstacles often associated with IHT reform.
OECD report considers IHT levied on beneficiaries fairer than tax levied on donor estates – UK is one of only three OECD countries to levy IHT on the whole of the donor’s estate. He specifies that “a particularly fair and effective approach would consist in taxing the beneficiaries on the gifts and bequests that they receive during their life by the means of a tax on the transfers of assets for life”, but recognizes that this would depend on the accuracy of the donation record. It also suggests that beneficiaries should benefit from a tax-free amount and that progressive rates would enhance equity and redistributive effects.
Recognizing that reliefs for business assets are planned to ensure business continuity, the OECD report stresses that exemptions or reliefs need to be carefully designed and that alternatives could be considered. This includes cap reliefs, resource testing and lower IHT rates for business assets combined with payment in installments.
The OECD report also examines another issue raised by the OTS review, namely the increase in the base cost of capital gains when an asset is inherited. He suggests taxing unrealized gains combined with flexible payment or deferral terms.
If IHT reform is on the government’s agenda, there is certainly a lot of research, documents and suggestions on how the UK regime might evolve. It must be considered in conjunction with other taxes on personal wealth and the financing of the cost of social care.
About the Author
Lindsey Wicks, Technical Writer, Faculty of Taxation