Time to act on inheritance tax and estate planning

Summer statement points to autumn Budget: a time to act on inheritance tax and estate planning?

History informs us that inheritance tax rules change  when there is the right mix of circumstances. The ingredients might currently exist and now is a time to act.

The Chancellor’s summer statement did not change inheritance and other wealth taxation. The summer statement did however trail the autumn Budget to come. With that in mind, this intervening period is one to actively consider estate and succession planning. A reason for that is what history tells us about when and how significant inheritance tax reform happens.

There have been a number of recent reviews of inheritance tax. Following these reviews by various bodies, my conclusion has consistently been that it will be a government need to pursue a particular (economic) policy agenda that will result in changes to inheritance tax. The political/economic mix matters a lot; technical tax reform less so. We might just have the political/economic element in the present circumstances to drive change. History has given us some examples of this.

With the spectre of the factors that lead to change, now is a time to actively consider estate planning. As well as the risks of reform, there are also other reasons why estate planning steps should be considered now.

Why act now?

The history of major changes to inheritance tax indicate there needs to be a few ingredients before reform happens. The ingredients in question seem to be: (1) the tax is too complicated; (2) the tax is not ‘fair’; and (3) the macro-economic situation creating a political momentum for change. The final ingredient (macro-economics and politics) is the decisive one.

The three ingredients seem to be coming together again. In the face of that, there is action that individuals and families as well as business owners and farmers should now consider.

Horrible Histories? What has happened before?

1894 saw the introduction of the modern notion of an inheritance tax: estate duty.

The late 1940s however saw significant reform and tax rates increasing (hitting 80%). The vital mix for change was present (1) the tax in its existing form had become complex and unwieldy with overlapping regimes in place; (2) the tax was considered to be ‘unfair’ as modest estates were likely to attract a higher marginal rate than larger estates; and (3) the United Kingdom was funding post-war reconstruction.

Fast-forward to the March 1974 Budget. While top rate inheritance tax (estate duty) went up to 85% in 1969, the 1974 restructure was even more dramatic. The rates came ‘down’ slightly to 75%. But, and this was a significant but, the tax was greatly widened. As well as capturing what happened on death, the tax now captured gifts made during life. The tax was now re-branded as capital transfer tax to reflect its wider scope as a more general wealth transfer tax. Again, the critical elements were there: (1) estate duty was viewed as needing streamlined and made ‘comprehensive’; (2) estate duty was said to give some in society ‘unfair advantages’; and (3) there was the Three-Day Week, an oil crisis, inflationary pressures and industrial unease.

In 1986 inheritance tax was the new name on the block. The ingredients for change seemed to re-appear for Nigel Lawson’s Budget: (1) capital transfer tax was viewed as two taxes meshed into one; (2) it was unfair and an “unwarranted impost” that deterred passing on assets; and (3) the mid-1980s UK economy was in something of a sweet-spot and liberalising the economy was en vogue. The new inheritance tax removed the tax on lifetime gifts to individuals. It also ultimately led to the current system of nil rate band and 40% rate (in 1988), 100% Business and Agricultural Property Relief (in 1992) as well as being able to ‘use’ a nil rate band every seven years.

While more perhaps more benign economic and political territory, 2006 is worth a quick mention. Partly as it emphasises that politicians and not technicians drive rule changes. Somewhat out of the blue, rules were introduced that restricted what could be transferred into a trust. It has recently been recognised, as part of a government consultation, that the use of trusts is driven by a desire to protect people rather than a trust providing a magic tax wand.

Let’s peer into 2020. Inheritance tax has had some changes since 1986, but no fundamental re-think (even in 2006). In 2019 and 2020 the Office of Tax Simplification (“OTS”) and the All-Party Parliamentary Group on Inheritance & Intergenerational Fairness (“APPG”), amongst others, have reported on reform. The OTS recommended reform in several areas to make the tax less complicated. So, we have ingredient one.

The APPG’s review concluded that inheritance tax is “distortionary” and “unfair” as well as there being wealth inequality that tax was not responding to address and understand. The second ingredient has been identified.

What about the third usual suspect ingredient? Well, that is not difficult to find. There is a global pandemic which apart from being a health crisis is an economic crisis. The extent of the economic crisis and the speed at which it happened means the government stimulus programmes have been costly (The Telegraph had reported the Treasury’s best-case estimate is £300bn) and the cost quickly incurred.

Government will now be anything but flush. Government will have options about how to pay this down. One option will of course be to increase tax. Inheritance tax could be changed to generate increased tax receipts. HMRC took a record £5.4bn in inheritance tax in 2018/19. But remember the Conservative Party manifesto pledge not to increase the rates of income tax, national insurance or VAT. George H W Bush’s pledge of “Read my lips: no new taxes” and what happened next is one to send shivers down the back of any government.

How might inheritance tax change?

Inheritance tax was not part of the election pledge, so there is more flexibility. But inheritance tax does strike an emotional chord (with key voters) and so ‘putting up’ the tax by increasing the standard rate from 40% or cutting the nil rate band is perhaps less likely. Instead, something akin to 1974 could be deployed. Something that fits neatly with the APPG’s recommendations. The APPG is in favour of bringing back lifetime transfer taxes. It also favours removing the very valuable reliefs for trading businesses and farms. It also recommends removing the use of a nil rate band every seven years as well as abolishing the important, but for many obscure, capital gains tax ‘uplift on death’.

If there could be moves to tax/restrict lifetime gifts and/or remove the favourable treatment of businesses and farms, now is the time to actively look at estate planning. The time to take action to explore passing on wealth and have it held on the right basis for future generations.

For succession law and estate planning advice, please contact Alan Eccles – alaneccles@bkf.co.uk