A quarter of estates worth over £10 million pay less than 9% Inheritance Tax

One in six estates worth over £10 million currently pay an effective tax rate of less than 4%, even among estates not eligible for the (uncapped) spouse exemption, whilst another quarter pay close to the 40% headline rate of Inheritance Tax (IHT). These huge disparities are driven by the use of allowances, exemptions and reliefs, including Business Relief, Agricultural Relief.

These findings come from a new report by researchers at the Centre for Analysis of Taxation (CenTax), published on the day Parliament meets for a Westminster Hall Debate on the future of Business Relief and Agricultural Relief, and amidst speculation that these reliefs might be a target for the Chancellor in the upcoming Budget.

The report finds that:

• On average, Business Relief almost halves the effective tax rate paid by estates worth over £30 million (from 23% to 12%), compared with only a one percentage point reduction for estates valued at less than £1.5 million. More than two thirds of Business Relief goes to around 400 estates per year claiming more than £1 million each in relief.

• Only a quarter of those claiming Business Relief on shares had been involved in management of a business as a company director at any point in the five tax years prior to death. This suggests that most claims for Business Relief are by ‘passive’ investors rather than ‘active’ business owners. This figure includes investments in AIM shares.

• Almost two thirds (64%) of Agricultural Relief went to around 200 estates per year that each claimed more than £1 million in relief, with an average estate value of £6 million.

• Agricultural Relief can be claimed by landlords as well as active farmers, provided that they have owned the land for at least seven years. Less than half (44%) of individuals who claimed Agricultural Relief had received any trading income from agriculture at any point in the five tax years prior to death. Income from agriculture made up less than a quarter of their income.

The report recommends a series of reforms aimed at making IHT fairer whilst preserving the key policy objectives of existing exemptions and reliefs:

• Capping Agricultural Relief and Business Relief at a combined limit of £500,000 per estate could raise up to £900 million per year. Two-thirds of estates claiming Agricultural Relief, and three-quarters of those claiming Business Relief, would be completely unaffected, but would increase the effective tax rates paid by the very largest estates (above £30 million) by around 7pp on average.

• Abolishing the Residential Nil Rate Band (RNRB) whilst increasing the standard Nil Rate Band (NRB) by an equivalent amount would cost around £1 billion per year, with all of the benefit going to estates valued at less than £2.7 million. For estates valued at less than £2 million, this would entail an increase in the NRB from £325,000 to £500,000.

• Capping the spouse exemption at £10 million would affect fewer than 0.1% of estates (100 deaths a year) and raise up to £350m in revenue. This reform would limit the current scope for tax planning, whilst ensuring that surviving spouses would not suffer a material reduction in living standards as a result of IHT.

• Combining all three of these reforms could raise up to £500 million, whilst at the same time lowering effective tax rates (on average) for estates worth less than £2 million. Under this package, only estates worth more than £8 million would see their effective tax rates rise by more than 5 percentage points on average.

Andy Summers, Director of CenTax and Associate Professor at LSE, said:

“Ideally, the UK would look to international examples and consider wholesale reform of our broken Inheritance Tax system. Clearly that’s not feasible in time for this Budget, but our report shows how the Government could raise revenues at the same time as cutting effective tax rates for most estates, just by limiting some of the excesses of our existing exemptions and reliefs.”

Arun Advani, Director of CenTax and Associate Professor at University of Warwick, said:

“Less than one in five Business Relief claims are for someone who was managing a closely-held business any time in the five years prior to death. Although Business Relief is often defended as protection for family businesses, it is poorly targeted for doing that, as well as being very expensive.”

James Forrester, Research Economist at CenTax, said:

“It’s striking how much the effective tax rate varies among estates with similar amounts of wealth. This is driven by a number of different tax reliefs, but much of the benefit of these reliefs is concentrated among relatively few estates.”

Read report