Labour and inheritance tax: what might we see from the new Government?

Speculation is mounting about what the new Labour changes to IHT may be and when they might be announced. Labour’s manifesto promised to, “make everyone, not just a few, better off” and included a “determination to build and share wealth”. It committed to keeping taxes as low as possible, with a focus on keeping taxes down for most working people.

We provide an overview of what is expected and how it could impact businesses and individuals.

The Labour manifesto includes a commitment to hold only one fiscal event each year, with significant fiscal events subject to an independent Office of Budget Responsibility (OBR) forecast. With party conferences being held in late September/early October, it would not be a surprise to see an October Budget.

Labour has committed to presenting a statement to Parliament on the state of spending by the end of July. Rachel Reeves also noted that, “This will be separate from a Budget that will be held later this year – and I will confirm the date of that Budget, alongside a forecast from the Office for Budget Responsibility, in due course.”

With the manifesto fairly quiet on inheritance tax, what changes could we see in the Budget, and over the course of this Parliament?

The only official statement in Labour’s manifesto about inheritance tax is that it will 'end the use of offshore trusts to avoid inheritance tax'. The proposed changes for non-doms and to offshore trusts are significant and may well require a substantial rewrite of the inheritance tax legislation. While other inheritance tax changes are not confirmed nor ruled out, updating the legislation to reflect these proposals may provide Labour with an opportunity for further and more sweeping inheritance tax reform.

If the new Government did increase inheritance tax, what might it do? While the manifesto is silent on this, a number of areas have come up in discussions, mainly reliefs. The new Chancellor Rachel Reeves said in 2021 that she would look at “every single tax break”[1].

In November, the then shadow (now actual) environment secretary Steve Reed, said that Labour had no intention of changing agricultural property relief (APR) [2]. This is of course not a binding statement. APR is a very valuable relief for farming families, and the Country Land and Business Association has raised concerns about the impact of scrapping it, commenting on the particular impact on small farms, with less resources to raise cash to pay an inheritance tax bill without selling land.

There has been no equivalent promise on business relief (BPR), and this is considered to be a likely target, though it may be more likely to be reformed rather than completely abolished.

Business Property Relief (BPR) was originally introduced as part of the 1976 Finance Act, by a Labour Government, and its aim was to ensure that family-owned businesses could continue to trade after a death. Currently, to allow farms and other family-owned businesses to continue without major disruption to the business on the death of an owner, agricultural property relief and business relief can apply to these assets. 

Where the criteria for these reliefs are met, agricultural land and businesses can be inherited tax free. Two particular areas where reform is rumoured include:

• Capping BPR and APR reliefs - a recent IFS report [3] recommended capping these reliefs at £500,000 per person
• Changing the requirement for the level of trading activity a business must take to qualify, potentially from 50% to 80%
  Impact of significant BPR reform

If these reliefs were abolished or significantly restricted, the application of a top rate of 40% inheritance tax would in many cases mean the business had to be sold on the death of the current owner to pay the tax bill. This would have significant implications for the employees and the stability of the business.

Very wealthy individuals may have other assets from which to pay inheritance tax, so this would be a particular burden to those whose farm or business is their main asset and livelihood. The current legislation has been regarded as demonstrating sound commercial sense in allowing businesses to continue without the looming risk of a forced sale on death. Farming businesses would often become unviable if a substantial proportion has to be sold. 

These reliefs have previously attracted criticism, with the implication being that wealthy individuals may invest in farmland or small businesses purely to shield their wealth from inheritance tax. However, a report commissioned by HMRC in 2017 noted views of taxpayers and advisers that inheritance tax planning was primarily driven by a desire to keep businesses and farms intact on the death of the owner. A reduction in inheritance tax liabilities was found to be a secondary concern.

In the days of estate duty, when there was no equivalent of business property relief, studies indicate that companies chose to hold significant cash reserves against a potential estate duty charge, with obvious impacts on companies’ ability to invest for the future and manage cash flow.

If these reliefs were abolished or significantly restricted, the application of a top rate of 40% inheritance tax would in many cases mean the business had to be sold on the death of the current owner to pay the tax bill. This would have significant implications for the employees and the stability of the business. Very wealthy individuals may have other assets from which to pay inheritance tax, so this would be a particular burden to those whose farm or business is their main asset and livelihood. The current legislation has been regarded as demonstrating sound commercial sense in allowing businesses to continue without the looming risk of a forced sale on death. Farming businesses would often become unviable if a substantial proportion has to be sold.

These reliefs have previously attracted criticism, with the implication being that wealthy individuals may invest in farmland or small businesses purely to shield their wealth from inheritance tax. However, a report commissioned by HMRC in 2017  noted views of taxpayers and advisers that inheritance tax planning was primarily driven by a desire to keep businesses and farms intact on the death of the owner. A reduction in inheritance tax liabilities was found to be a secondary concern.

In the days of estate duty, when there was no equivalent of business property relief, studies indicate that companies chose to hold significant cash reserves against a potential estate duty charge, with obvious impacts on companies’ ability to invest for the future and manage cash flow.

BPR also applies to shares in unlisted companies, which for the purposes of this relief includes shares listed on the alternative investment market (AIM). This application to AIM listed shares has garnered press attention in recent months and could be an area that is targeted.

This is on the basis that investing in them has become increasingly popular as a tax planning strategy and may not meet the policy objectives of the relief anymore.

Currently, pension funds are exempt from inheritance tax Rumours indicate that Labour could seek to include pension fund in the taxable estate on death, though there is no hard information. Any change may well include spousal transfer exemptions and there is speculation that this could come with a new pension nil rate band.

Labour might draw from past reports when considering any inheritance tax changes. Options suggested by an All Party Parliamentary Group in 2020 [5] included introducing a charge on lifetime gifts, their suggestion being 10% over a £30,000 annual allowance and abolishing agricultural property relief and business relief in favour of a system where the inheritance tax charge was spread over 10 years. The IFS report suggests bringing pension funds held at death into the inheritance tax net, alongside capping BPR and APR as mentioned above.

More recently, the policy thinktank Demos has just published a report analysing the inheritance tax system and options to improve it [6]. This extensive report looks at several options, and compares the UK system to other countries’ models, but its key recommendations include:

• Make changes to business property relief, which it feels could provide more value for money
• Introduce progressive rates
• Remove the capital gains tax uplift on death

It is hoped that any significant change will be introduced though consultation, allowing more time to plan for future changes. Those whose business depends heavily on the availability of a particular relief may wish to take advice now. Bringing forward planned gifts and concluding on ongoing projects which may be affected should be considered, although always bearing in mind that tax is only part of the equation.

Please do get in touch with your usual contact or the contacts listed if you would like to discuss any of the above.

[1] https://www.ftadviser.com/your-industry/2021/09/27/labour-vows-to-review-every-single-tax-break/

[2] https://www.ft.com/content/ebd4c62b-6800-4688-ba59-18143d38dfd3 

[3] https://ifs.org.uk/articles/raising-revenue-closing-inheritance-tax-loopholes 

[4] https://assets.publishing.service.gov.uk/media/5d274fad40f0b61158962af5/Final_Inheritance_Tax_2_report_-_web_copy.pdf 

[5] https://www.step.org/system/files/media/files/202005/STEPReform_of_inheritance_tax_report_012020.pdf 

[6] - https://demos.co.uk/wp-content/uploads/2024/07/Future-of-IHT_Report_July.pdf 

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