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A small group of the UK’s wealthiest estates were able to shelter £1.8bn of assets from inheritance tax in 2020-21, new data has revealed, reigniting a debate over which types of businesses should receive the lucrative relief.
Some 68 estates, all with business assets worth more than £5mn, collectively benefited from inheritance tax relief on £1.8bn of their assets, a freedom of information request from think-tank Demos found.
Data from HM Revenue & Customs showed that 3,380 estates in 2020-2021 claimed the tax break — known as business relief — on assets worth a total of £3.2bn.
The measure, introduced in 1976, provides up to 100 per cent inheritance tax relief on the transfer of business assets or shares in an unlisted company, and was originally intended to prevent private businesses being broken up on a death.
But a provision that also allows holdings in businesses that are listed on London’s Alternative Investment Market to avoid the tax has seen share portfolios come to dominate claims for the relief, according to Demos.
The group of 68 estates that benefited the most in 2020-21 represented just 2 per cent of all claimants in the year, but accounted for 57 per cent of the assets benefiting from the tax break, the FOI response showed.
Estates with over £2.5mn of business property accounted for 53 per cent of the total relief claimed in the year 2019-20. They accounted for 69 per cent in 2020-21.
“It is quite shocking that over half of the relief goes to 68 estates,” said Dan Goss, senior researcher at Demos who specialises in IHT. “It’s a very small number of the wealthiest benefiting from the vast majority of the relief. Business relief is being used as a way to reduce tax bills for those estates at the very top.”
There have been calls for the measure to be better targeted, and Goss said that the justification for including Aim shares in the relief was unclear.
The Institute for Fiscal Studies also recommended last month that relief should be capped at £500,000 per person, and that provisions on Aim shares should be scrapped. Removing the exemption would result in £1.1bn extra tax in the current year, it estimated.
Goss said the government originally extended business relief to Aim-listed holdings because of concerns they were harder to sell quickly than other shares on more liquid exchanges, such as the main London Stock Exchange.
However, an increase in the volume and value of companies being bought and sold on the junior market had reduced that rationale. Aim had just 10 companies listed in 1995 — by the end of March 2024 it had 738, including 101 overseas businesses, said Goss at Demos.
“This suggests the shares would be more liquid and the basis for the relief may no longer hold,” he added. “Some of the benefit [from the reliefs] will be going to non-British businesses, which isn’t good value for money for British taxpayers.”
However, other tax experts warned that removing the relief for Aim investors would have unintended negative consequences as shareholders rushed to get their money out.
Nimesh Shah, CEO at tax advisory group Blick Rothenberg, said he suspected there would be a tightening of IHT breaks, including business relief, after the general election. But he warned that this should be done carefully.
“I still think there is a policy justification [for IHT relief on Aim shares],” he said. “It’s there to encourage private investment in small-cap companies and it could have very adverse implications for businesses and a knock on effect on people’s money, if you get rid of it with a cliff edge.”
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