Episode 23: Inheritance Tax
Mubin speaks to Dan Goss from Demos and David Sturrock from the Institute for Fiscal Studies about their research on inheritance taxation. For more information on inheritance tax you can read the following reports funded by the Trust:
Inheritance Tax reliefs: time for reform?
Options to repair inheritance taxation in Britain
Raising revenue from closing inheritance tax loopholes
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Transcript
Mubin Haq: Welcome to the Financial Fairness podcast with me, Mubin Haq. Today, we’re focussing on Inheritance Tax. It's a tax actually few of us ever pay, but there’s huge amounts of wealth that's going to be passed down.
Now it won't have escaped your attention, that there were some big changes to this tax during the recent budget, and media coverage – much of which has been negative – certainly won't have escaped the attention of the Prime Minister or the Chancellor, especially as there have been hundreds of tractors driving through Westminster in protest.
We’ll be digging into those changes as well as examining public attitudes. Is inheritance tax the most hated tax? Or are the public less jaundiced and more supportive than we might assume?
Joining me today is David Sturrock, David is a senior research economist at the Institute for Fiscal Studies and has written extensively about inheritance taxes.
We’re also going to be hearing from Dan Goss, a senior researcher at the think tank, Demos
But first of all, we ‘re going to hear from David, who's going to give us a 101 on inheritance tax.
Mubin Haq: Welcome, David. Thanks for joining us on the podcast.
David Sturrock: Thanks for having me on.
MH: Before we come onto changes in the recent Budget, can you give us a brief overview of inheritance tax
DS: Yes. Inheritance tax is levied on estates left at death. So that's the wealth that is left behind when someone dies. And for that estate, you have a certain amount that can be passed on tax free before there's any inheritance tax. For an individual person that's £325,000, there's an additional £175,000, if you're passing on a main home to your children or grandchildren. So that could give you half a million tax-free.
And then above that, broadly speaking, you get charged, tax at a 40% rate. I should add, if you're passing on wealth to a spouse or civil partner, that's not taxable.
MH: And there are some further allowances if you’re married. Can you explain those? And hypothetically if your estate was worth £1.5 million, how much inheritance tax would you actually pay?
DS: Let's say you're the second person in a couple to pass away. So your partner's passed on all your other wealth to you.
That means that you get to use their allowances as well. So that's how we get to the £1 million to pass on. And then above that, is when the tax starts to be paid. So if it was a £1.5 million, you'd be paying tax on that half a million above the £1 million tax free. And generally speaking, you pay 40% of that. So, £200,000 pounds in tax.
MH: Okay. Well, I'm glad you could do the maths.
DS: Are you just testing me Mubin?
MH: Yes, sorry David. I’ll be asking you about the price of a pint of milk next! I think there’s a lot of confusion about the 40% and what it actually applies to - the whole estate or the amount above the threshold. And part of the problem is that it’s a tax we don’t often encounter.
DS: I think that's right. You won't have had any contact unless perhaps you’ve been someone who has had a family member pass away. And for a lot of people, there's also quite a lot of uncertainty about how much wealth they are going to leave behind. And so people don't really, in the end, maybe know that well how inheritance tax is going to apply to them. And there are a lot of different polls that show that more people think they're going to end up paying inheritance tax than they actually do in the end.
MH: Yeah. So how many people actually do pay in terms of estates?
DS: So we've got about 40,000 estates each year that pay some inheritance tax. Now, let's put that into context of, around a bit more than half a million people passing away. So about 6% of deaths at the moment, resulting in some inheritance tax being paid. It's quite a small minority of people who will have any inheritance tax paid on the wealth that they leave to the next generation.
MH: So that's a really tiny number of people are affected by this, but it seems to have a disproportionate impact in terms of the public psyche.
DS: That's right. I mean, I think again, that could be partly because of that uncertainty about who's paying, whether you're going to pay. But also, as we're going to get onto the tax, potentially doesn't work in a very fair way. So there's some kind of, discontent, let's say, about how it applies, how it works in the sense that maybe it's not really applying fairly across people.
MH: And how much does it actually raise?
DS: So it's about £7 billion a year. Again, let's put that into context. Government revenues at the moment are about £1 trillion or £1,000 billion per year. So that £7 billion is 0.7% of government revenues. So we are not talking about large amounts. This is a kind of almost a rounding error, when it comes to the government budget.
MH: So less than 1% of tax is from inheritance. Is that set to change David, as larger inheritances are being passed down by the baby boomer generation? Will that lead to more tax revenue for government?
DS: Yes, I think so. In short, the, what we're seeing is that if you look across the different generations who are older ages, then those who are in their earlier retirement, they're much wealthier than those who are in their later retirement and passing away at the moment.
And so what that means is that in the coming decades, as, as these richer generations are getting to the point where they're passing away and passing on their wealth, that flow of inheritances is going to increase pretty rapidly and, crucially, more rapidly, we think, than are the earnings of the people who are receiving it. So what that tells you is that wealth is becoming kind of more important compared to earnings from work.
And again, while it will still be a minority of people being taxed on that wealth, I do think that the revenues are going to grow and we think that in real terms, inheritance tax revenues could double by the early 2030s.
But a big part of it is just that those who are passing away will be much wealthier and therefore have larger estates. And so more tax revenues potentially to be garnered by the government.
MH: Yeah, but still around the 1 to 2% mark is what we're expecting in terms of government expenditure.
DS: That's right. So even if you take, say the latest government forecasts after the budget, then they think, in five years time inheritance tax revenues up to 1%. You know, I think maybe it could go higher than that, but we're still, not talking about it becoming a main tax or anything like that.
MH: Are the wealthiest paying the highest proportion of tax? I ask that because there is considerable concern amongst the public that the wealthiest make use of exemptions and loopholes. How accurate is that picture?
DS: Yeah. So, I mean, you'd think from the way that I described the tax, that should mean that the larger your estate above that £1 million threshold for a couple, the more tax you will pay as a percentage of your estate. But it's not quite like that because the system also has some exemptions.
And we're going to get on to talking about these because they've been changed in the budget. But until the budget anyway, you could pass on agricultural assets, privately held businesses and pension assets without any inheritance tax on those. And the result of that is that because some of those assets are held in, particularly large amounts by the very largest estates, so say above £10 million or so, the rate of tax that is paid on those particularly large estates is actually, lower as a percentage of the estate than on those estates that are a bit smaller.
So basically, once you get to being very wealthy and you can maybe start to take advantage and you move your money into those tax relieved forms, you don't pay as much inheritance tax as you might think. And that, I think, is one of the reasons why people, might feel the tax is a bit unfair.
You know, if you have kind of moderate or, still, well, you're still going to have to have quite a lot of wealth to pay inheritance tax. But let's say it's all in a, in a big house, then maybe you don't really have the ability to transfer your wealth, into a form that's inheritance tax free. You can't really take advantage of those reliefs in the same way as you can, as if you're dealing in the multiples of millions, and you can just kind of move some of your cash into a special form that doesn't pay inheritance tax.
MH: So we've got some squeezed millionaires who are facing the pinch. Is that right?
DS: That's it, that's it. So yeah, it is important to keep things in context and remember that when you're talking about that unfairness you're talking about the fairness between those who are still, in the very top of the wealth distribution.
MH: Can I just ask quickly how our inheritance tax system compares to other countries, what do they do differently? And do some of them do it better than we do?
DS: The UK is a bit of an unusual country in few respects. One is the fact that that tax is levied on the amount of money that's left when you die - the estate. The majority, of at least advanced economy countries levy the tax instead on what you receive. And there's some good arguments for why that would be a better way to have the tax. I mean, if you're concerned about kind of inequalities transmitting down to the next generation, then it probably should make a difference if I'm splitting my estate across everyone and giving everyone the same amount, or if it's all very concentrated in one individual. The other thing that's kind of unusual about the UK is that we have just one rate, that 40% rate and internationally it's quite high. Other countries tend to have a number of different rates. You kind of go up from a, a lower level. And when your estate gets larger, you pay a higher tax rate. You know, as happens with, say, income tax. We don't have that. We've got one rate and it applies above a relatively high threshold. So as we've discussed, not that many estates pay it, but once you do, it's quite a high headline rate, which also probably feeds into some of the behaviour to then try and avoid the tax.
MH: That’s really interesting David. The other key change relates to gifts. Can you say a bit about that?
DS: Yeah. So we have some taxation of gifts in the sense that those made in the last seven years before your death count towards your estate. A lot of other countries tax the annual flow of gifts. But in the UK, we’re potentially unusual compared in that for much, of much of life, if you, if you're not close to death, then you can pass kind of unlimited sums on to say your children, in the form of gifts without that ever being taxable.
MH: Yeah. And that's increasingly happening, isn't it? You know, this whole thing of the bank of mum and dad and helping people to get onto the housing ladder, and that's causing quite a bit of distortion as well in terms of who can access housing and these opportunities.
DS: Yes, that's right. Getting that bit of cash to get onto the housing ladder, that kind of assistance from your parents can be much more important. And we've seen these gifts growing in real terms. And we see that there really are closely connected to, to say, house purchase when people are in their late 20s and early 30s.
Mubin Haq:
Thanks David for that overview. Before we get onto the changes in the Budget, we’re going to hear from Dan Goss. Dan is a Senior Researcher at Demos and has been undertaking some in-depth work on understanding public attitudes relating to inheritance tax, which we’ve been funding at the Financial Fairness Trust. And we’re going to delve into these public attitudes first and how that has shaped some of the decision-making by government.
Dan, thanks for coming on the show.
Dan Goss:
Thanks a lot for having me.
MH: Look, no one likes taxes. And the common assumption is that inheritance tax is the most hated tax, and it's hugely unpopular. But is that actually the case. Is it the most hated tax?
DG: I mean this is or definitely was a common assumption. And it's primarily based on polling that asked people basically whether they think different taxes are fair or unfair. And in those polls, inheritance tax is seen as unfair by a large proportion of people and sometimes actually more than any other tax. But importantly, that's not the full story.
Actually when you ask people which taxes they want to be cut, inheritance tax doesn't even make the top five. So the basic rate of income tax, council tax, VAT, national insurance, they all come above it.
And effectively people want to cut taxes that they actually pay. On the flip side, when asked even just a few months ago which taxes they'd like to see increased for the budget, inheritance tax comes at number five. Just under the higher rates of income tax, corporation tax and capital gains tax. And again, people choose taxes that they don't pay.
So that really doesn't show that it's maybe the most hated tax.
MH: So the work you've been doing at Demos has really been trying to dig underneath these common assumptions as to, you know, what people think about inheritance tax. Could you just tell us a bit about what you found?
DG: Absolutely. Yeah. I mean, so we've been looking at this for over two years now, and I think there's probably about three parts really to the research that we've done.
And the first was digging into those assumptions that inheritance tax is universally hated. We did a large survey, and this uncovered quite an interesting quirk about public attitudes to inheritance tax. And this was that basically when you ask people about taxing inheritance in a general sense, a majority thought inheritance should never be taxed.
But actually, when you ask people how much inheritance people should be able to pass on tax free with an option that there should be no inheritance tax, actually, the average response was just £300,000. And this is actually lower than the current threshold that most people pay. So this suggests actually when you sort of present people with the policy options, people are quite keen on inheritance tax. Even when presented with this question, just 20% said inheritance should always be tax free.
The second part of our research was then about digging into the reasons why some people are opposed and why some people are more supportive. We did this by running a segmentation analysis on the survey, and this basically divides people into different clusters based on the patterns of attitudes that they have around inheritance tax.
So we divided this and ran a series of focus groups with each cluster. And the four cluster groups that we identified were Aspirational Individualists - and these are older home owning conservatives generally who, think about inheritance tax in terms of the kind of emotive associations we were talking about, like death tax and double taxation.
There were the Fiscal Sceptics and they’re middle aged, middle income, sometimes renters who strongly associate inheritance tax with issues such as tax avoidance and the personal stress of doing tax admin after a death.
There were the Social Pragmatists who were older, home owning high earners who see inheritance tax as a pragmatic way to contribute to public spending and its benefits.
And then the Radical Progressives, a cluster group who were generally younger metropolitan graduates, who see inheritance tax as a way to tackle problems like inequality and support the poorest in society.
We then dug into various of the reasons why, all those different groups support and oppose inheritance tax to allow a more targeted approach to understanding public attitudes and designing a policy. And then the last part of our research was about actually designing those reforms. And we did this through an extensive public deliberation, which is where we brought together 27 members of the public over six two-hour sessions to explore different options of reform.
We went through a whole range of options discussing the costs and benefits. And then we at Demos brought all the evidence from that together, ran some economic analysis on different options, discussed various options with experts, and built a set of recommendations around that.
MH: Let's just go back to those, four different groups that you identified.
What were the, views that those various groups had in common which were supportive of inheritance tax? Was there any sort of common ground in relation to the tax?
DG: In terms of all four groups, there wasn't a huge amount of common ground, but I think there was a definite agreement across all groups. And even the Aspirational Individualists, the people who think of the world in quite individualistic terms and also have quite an emotive response to inheritance tax. Even they agree that, for example, the ultra wealthy are too wealthy, that there is a problem with extreme wealth in this country.
And even those people also agree that it is important that the government has funds. And beyond that, there is a lot of complicated disagreement about exactly how the government should get those funds. But everyone agreed that public services and public funding was an important thing that we should consider in any policy.
All of them felt that a loss of £7 billion to public funds would be a problematic issue that we should be concerned about.
In terms of their concerns around inheritance tax, all four groups actually felt that inheritance generally has quite a small impact on inequalities in the UK. A lot of policy wonks approach inheritance tax in terms of its ability to fight or tackle, intergenerational inequalities in the UK, but really across the board most of the public don't see inheritance tax as having a big role in that.
There was a broad agreement that inheritance tax felt like a sort of grabber of money by government, and then we have no idea where it goes. And all groups agree that avoidance is a big problem, particularly with inheritance tax, and want to see policies and reforms that can minimize the ability for the well-advised or the bad intentioned to avoid or evade the tax.
MH: So given so few people actually pay this tax, why do so many people think they are going to pay it and end up therefore being against it? What's the rationale there?
DG: Yeah. So most people will deal with inheritance tax potentially never in their life. Or if they will deal with it, it will be maybe once or twice. This is because people will only deal with it generally if someone in their immediate family dies and they are the executor of the estate. And this will happen often very much in later life. And so people basically have a very low level of engagement with inheritance tax, unlike things like income tax or national insurance or VAT, which you pay on a very regular basis, and you can understand. Because of that, I think people can just essentially get distorted ideas of the facts around it and really overestimate the extent to which they will pay it.
There is also just an uncertainty around actually how much wealth people will themselves have. People maybe will overestimate their wealth at death. And this is often because actually people's wealth at death is generally not their peak wealth. They will spend down their wealth during retirement, that they have built up in their life.
MH: So there's some wishful thinking potentially as well, at play as to how much people will leave. There’s also an issue in relation to thresholds as we heard earlier from David, and many people not really understanding them.
DG: I think absolutely. People don't understand the thresholds. Yeah. From our view from, and from our research very few people really have a clear understanding of the threshold. And particularly there's some people who may understand the minimum £325,000 household, but understanding and being aware of the additional threshold of £175,000 for people passing on a home to children or grandchildren. And then the combination of thresholds for married couples is quite a confusing thing. And very few people would be aware of or understand that.
MH: And that's a huge sum of money that people are effectively going to get tax free. But there's this whole thing about double taxation. And so could you just say a bit about that and how the public react to that sense of double taxation?
DG: Yeah, absolutely. I mean the double taxation thing is a very visceral thing and people feel it very strongly. It’s one of the key drivers of upset around inheritance tax. And I think it's an interesting argument. The approach that policy wonks often take to double taxation is they say, well, VAT and council tax and effectively, any tax that you pay after income tax, is double taxation. So why do we care so much about inheritance tax? And it's a very valid argument. And the way that the public sees it though is that with VAT or council tax, they are getting something back for their money. They are with VAT getting the product back and with council tax, they are getting a very clear service in terms of council provision, whereas with inheritance tax people don't see that.
MH: Is one of other downsides that it's quite emotional because it comes at a time of death? Somebody’s often lost a loved one, somebody they really cared about and here's the government coming in trying to take money away.
DG: I think that is a really big issue. And I think there are two parts of that. One is the sense of there is grief surrounding a death and the idea of doing tax administration at that time can be quite upsetting. It is important to say people have six months after a death to pay the tax, and, so there is a decent period of time to sort through the administration. But there is still an impetus to make that as easy as possible and avoid adding additional stress.
The other part of it is also that people feel that during a death of a family member, there is no reason for the government to be imposing themself in that scenario, because they see their family wealth as effectively their wealth. They see it as effectively as a passage of wealth from inside their household to another person inside the household, and why is the government involving itself in that.
MH: Let's just go back to the work that you did with the public, which was trying to think through what they would like to see in terms of the changes to inheritance tax.
What were the top lines here? What do they really want to see and what did they not want to see?
DG: The highest priority reform for members of the public was actually a progressive rate. And this is something that hasn't really featured in the debate, but is something which the public were really keen on.
And this was really the sense that people felt it was very unfair that everyone paid the same rate, and that the jump from 0% to 40% just over the threshold was too stark. And I think this really illustrates how a progressive tax or progressivity in the tax system is a really fundamental principle. People feel that if taxes are going to be increased, it must be done in a fair way.
And a key principle of fairness is that those with the broader shoulders bear the heavier burden. Of course, you can do this with thresholds, as is the case with inheritance tax. It only applies to some of the wealthiest estates, but a progressive rate would really underpin that principle.
People were also keen for higher inheritance tax on larger businesses. People felt that businesses can avoid the tax too easily, and those larger businesses didn't pay their fair share. But at the same time, they felt that smaller businesses and this was generally characterized as local businesses, businesses on people's local high street where they perhaps knew or were familiar with the owner and that these should be protected from any higher taxes.
MH: Yeah. So basically they'd want a tax on somebody like Greggs, but not on your local baker. Is that right?
DG: I think that's correct. Yeah.
MH: Though Greggs is quite popular.
DG: Yeah I yeah, yeah, yeah I don't know of. No I wouldn't want to be too harsh in my criticism of Greggs, but I think yeah.
MH: So look, we've talked a lot about inheritance tax. But there's another bit which is a bit more hidden, in terms of this debate, which is about gifts. So this is where people pass on an amount of money which might be used for, say, a home deposit or just to help you out during a difficult time. How did the public feel about that and whether or not that should be completely tax free?
DG: Gifts given prior to the seven years before death are completely tax free. Gifts within that seven year period before death are taxed at, at an increasing rate over the seven years, but before that, completely untaxed. And the problem with this is, is twofold. One is that, it means that people can give away all their wealth completely tax-free and completely avoid inheritance tax, which would reduce the revenues that we can gain from inheritance tax.
The other problem is a distributive one. And this is because the people who are more able to do this are not only the people who are well advised but also people with more liquid assets. So this can really benefit people who have more wealth.
The public, though, are quite concerned about adjusting the tax on these. They were very concerned about a couple points in particular. There was first, that gifts between family members during life are really something the government should not be involving themselves in that this was a very private issue. There is also a strong sense that the tax would be very easy to evade.
MH: Thanks Dan, that’s given us a really useful insight into how the public feel about inheritance tax and what lies beneath some of those views. We’re now going to go back to David from the IFS to hear about what happened at the Budget.
MH: Can you just give us, quickly, some of the top lines that the Chancellor announced?
DS: There's a few different parts to what's happened. But basically you've seen some getting rid and curtailing of the reliefs that are in the system. So pensions, pension pots, now taxable as part of estates. Business and agricultural reliefs, those have been scaled back so that now there's only a limited amount that can be passed on tax free, and then some inheritance tax being paid for amounts above that.
And then finally, the thresholds above which you start to pay inheritance tax have been frozen. And that means that more people will be brought into paying the tax.
MH: Let's start with pensions. Because we saw big change there and it's been quite a recent, sort of loophole that's been created. I'm not sure if loophole is exact technical language, but, there were some really large sums which were going to be passed on tax free via estates. Could you say a bit more about that?
DS: A couple of changes really, in the pensions policy landscape in the last decade have made this a much bigger issue. The first thing was pension freedoms, which said that if you had a pension pot, a defined contribution pension pot, you no longer had to turn that into an annuity. Which means that you might still have some of that pension pot left when you pass away. And you could now pass it on to the next generation [free of inheritance tax] in a way which was not as possible before.
Second thing is more recently getting rid of the lifetime allowance, which was just over £1 million. So that means that, whereas before there was kind of some cap on how much you could put into a pension in a tax privileged way. That particular cap anyway, was got rid of. So we were sort of heading towards a world where pension pots, were a very good vehicle for passing on wealth to your children or anyone else if you wanted to do that. And in fact, you know, we saw that that was being advised by financial advisers. What's happened now is that these pension pots have been brought into the scope of inheritance tax. And so that means that, I think in a way which is sensible, they're going to be treated in the same way as another asset that you're passing on.
So alternatively, you might be putting your money into an ISA and some of that might be, being left to your kids. Those two assets are now going to be subject to inheritance tax.
MH: So broadly, this is a good move and it closes that loophole.
DS That's right. And I think that it's good that this has been done now because those pension pots are going to become more prevalent because we're kind of moving between a system where people had company pensions paying out an income which couldn't really be passed on, to one where you have this individual savings pot.
MH: Then we had the change to, business assets and, it's slightly complicated, this, isn't it, in terms of what that actually means?
DS Yeah, it's a bit complex because different forms of businesses are treated in different ways by the inheritance tax system. So if we go back before the budget and, you know, what's the system at the moment, then you can pass on, your holdings of a private business and even majority stakes in the public company and certain other types of shares, inheritance tax free.
There's kind of a bunch of rules around there. But let's not get into the weeds on that. What the budget's done is said you can now pass on £1 million of that tax free, it's £1 million of business or agricultural property, which we’ll get on to, and then above that £1 million, you're no longer getting 100% relief from inheritance tax, you're getting 50%.
So effectively over the thresholds, you're paying 20% inheritance tax on those business assets where previously it was zero.
MH: And as you say, this is applying to agricultural land as well. It's a similar, change that's operated there and it's combined with the business relief.
DS: That's right. So it's an £1 million allowance for agricultural or business property combined. If you're passing an agricultural property in quite a lot of cases, people are also passing on business assets.
MH: What do you think was the rationale behind this change? Was it just about raising money, or were there other things that the government was trying to do?
DS: So taking the government at their word and what they say was the reason for these changes anyway, is that, yes, revenues is one thing, but they also talk about the fairness in the system. And we do know that some of the largest estates are particularly likely to be using some of these special reliefs and for that reason were paying lower, effective rates of inheritance tax. And so there's this idea that in order to be fair between people who hold their wealth in different ways, inheritance tax should apply in the same way to different types of assets.
MH: So effectively, what you're saying is some people were buying up farming land, so that they could avoid paying inheritance tax. Is that right?
DS: That's right. I mean, I think, you know, if you've been looking at the newspapers you'll see that there are some very wealthy individuals who are kind of known to hold very large amounts of agricultural land and to be doing that as a way of avoiding inheritance tax.
So that's one, kind of, issue that the government, I think, was trying to deal with. It's worth saying that even amongst those who are not kind of super wealthy and kind of actively buying up agricultural land to avoid the tax, it might still be that the rationale for this is to treat people who have the same amount of wealth in the same way, even if they're not kind of, wouldn't see themselves as actively tax avoiders.
MH: And given that, there was so much interest in agricultural land, I'm guessing this was driving up prices as well. So it's become more expensive to buy farming land.
DS: We don't know exactly how much it would be doing that, but you would think, it's going to have some effect.
If you do something to kind of reduce the special tax treatment of agricultural land, then in principle, anyway, it should make it easier for someone who wants to become a farmer to, to get into farming and to buy land.
MH: So just coming back to this million pounds, it can be sometimes more than that and likely to be more than that on a number of occasions. Can you just explain that?
DS: The million pounds is in addition to your regular tax-free threshold. So as we were talking about before, if you're passing on a home to your kids as well, then you've got £500,000 tax free. Add on to that, this new £1 million and you've got £1.5 million.
Now again, in a couple, you can both take advantage of these tax free amounts. And so that means that combined, it could be up to £3 million that you're passing on as a couple. And actually in some specific cases, you could get even more than that tax free. The kind of absolute maximum, is £2 million for an individual, £4 million for a couple.
MH: So how many estates will be affected by this David?
DS: So the government thinks based on what they've seen in, in the last few years of estates data, that about 500 estates who claim some agricultural property relief would pay more tax as a result of this change.
Now, that's compared to about 1,800 who would be claiming something. So a bit less than 30% of those who are passing on some agricultural assets potentially paying more tax as a result of this reform. It's important to remember, you know, it's a bit of a debate going around about how many farms and what percentage of farms are going to be impacted. Those two things are different.
It's difficult to say how many or what proportion of farms might end up in an estate that is going to be affected by this change, because it depends who owns them.
It's worth noting that those numbers, this 500, is before we've kind of got into whether people will change their behaviour as a result of this reform. So some people might start to pass on that farm as a gift, earlier in life.
So it could be that the actual number affected in the end is lower than that 500.
MH: And the National Farmers Union are really contesting these numbers, aren't they?
DS: They are. So the contesting comes from starting from a different set of figures, looking at the value of farms that are out there and saying, look, the vast majority of farms are worth more than £1 million.
But the kind of the difficulty is that, whether a farm is going to be affected depends on how it's owned, how many people own it, if it's going to be split between multiple estates. And so it's not easy to kind of draw straight conclusions from looking at the value of farms.
MH: Yeah. So I think what you've suggested is that we're going to see quite a lot of changes in behaviour potentially from this in terms of how people pass on, before death, farms and agricultural land. Will it lead to any other changes as well, will farms have to be sold off in order to pay inheritance tax? And people who have been farming for generations no longer be able to do that?
DS: Some people will change their behaviour. They might start passing on these farms earlier on in life. There are still potentially going to be some people who are going to be paying higher tax as a result of the change.
So what are the implications of that? Well, the tax payment can be spread over ten years. Even then it could still be potentially consuming quite a large share of the, of the income that's coming from the farm. And, a lot of farmers are pointing that out.
There might be further things that people can do. They maybe might save up some of their income or kind of borrow to try and spread the payments over a longer period. But even then, it might be that, in some cases, you know, this means that for some farms, they deem it not viable.
So in some cases that might mean people selling parts of their farm, parts of the property, in some extreme cases, perhaps the whole of the farm. And there's kind of a couple of things to think about. The first is well what does that mean for farming? And then what does that mean for the ownership of the land?
Now farms could be sold without that necessarily resulting in a change of the use of the land, because maybe someone who buys it still uses it for farming, maybe even the same people who are working on that farm, as owned it before. But this will mean that the kind of ownership of agricultural property and land will kind of be more spread out.
MH: Yep. And, do you think this will lead to some of this speculation in terms of agricultural land ending? So, you know, the wealthy individuals buying up huge swathes of land. Do you think it will have a desired effect?
DS: I think, I imagine it will have some effect. And you have reduced its value as a tax avoidance vehicle, but it's far from eliminated it.
So you still are paying a lower rate of inheritance tax if you hold that land than on many other assets. And so, you know, in a way, the thing that I maybe do worry about a bit is that, it it's far from getting rid of the incentive to, to engage in this behaviour. So while there might be some effect, I don't think we're going to be getting rid of people buying up agricultural land for inheritance tax avoidance reasons.
MH: And, if you could tweak this policy what would you change? Would you go full hog and say, oh no, we need, no relief at all?
DS: In my kind of ideal system, I would say apply inheritance tax equally across all assets. I would like to make clear that, you know, that's consistent with the government still supporting agriculture or certain uses of land in other ways, if they think that's important.
But getting into this policy as it is at the moment, and what might we want to tweak or change. One thing is that if you're kind of a young farmer in the new system, you've got a lot of time to potentially pass on your farm to your heirs tax-free. Now, if we think that you know, we're happy for that to be taking place, and we want to restrict inheritance tax to being applied to transfers at the end of life, then maybe you think that those who own a farm now and for whom this kind of new system is now just coming into place, should have the same chance to pass on a farm tax-free as a gift before that's kind of taken away.
So, at the moment, if you pass away in the next seven years, after the new policy is in place in 2026, any gifts that you've made would be counted as part of your estate. And so you don't have the chance to make that sort of tax free-gift now, if you're close to death. So you could say, let's have some period of time in which transfers, lifetime gifts of agricultural property that are made, don't count towards estates so that people kind of get the chance to take advantage of that in a way that will be possible.
DS: You might also not like that proposal because, let's say there's someone who's just holding that land for tax avoidance purposes well now they've got a bit of warning, they can pass it on tax free and not be captured by this kind of change in rules. So as ever, there's kind of trade-offs involved.
MH: Yeah. And there's a danger of not raising any money from that policy at all.
DS: Yes, that change would mean lower tax revenues in the kind of immediate term, but it wouldn't change what you should raise from it in the long term.
MH: Do you think we will see some tweaks from the government in relation to this policy, or do you think it's quite hard and fast?
DS: It’s hard to judge from the outside, I don't think they're going to radically change it. Maybe they'll do some of the kind of smaller tweaks that we've discussed.
I think that really a lot of it comes down to not just the economics, but the politics of it. And now how does it look to change your policy after you've kind of had all this attention and pressure. So I think that as much as the kind of merits of any change will be what drive the decision in the end.
MH: Yeah. So expect to see some more tractors down Downing Street or just outside anyway.
DS: Quite possibly. Yes.
MH: Yeah, great. Thanks, David for your time. That's been really insightful and useful.
DS: Great, thanks. Enjoyed it. Good to be here, thanks.
MH: Ok, let’s go back to Dan from Demos to understand how some of these policy changes will have landed with the public.
Dan, how do you think the public will have reacted to the inheritance tax changes announced in the Budget?
DG: I think it's important to note that most of the public won't have engaged directly with the reforms that were made. So, for example, when YouGov asked just after the budget what people associated with the budget, just 3% of people associated the budget with inheritance tax rises.
So really, most of people's perspective on the changes will be through the media narrative following that. And of course, then we have seen the media narrative really centering on the changes to farmers and, and actually very little centering on the changes to the relief for businesses.
MH: Or pensions.
DG: And pensions received some attention. But yeah, maybe not, not a huge amount. Definitely not as much as the farmers. We saw in the first week or two, most of the focus really centering on the National Insurance rise and very little on the inheritance tax changes.
And so I think at that point, very few of the public will have known or cared about the changes to inheritance tax. Most of the public perception of it now will be driven by these particular media stories and really thinking about the farm situation.
Our research found that actually people were quite cautious about making any changes to the tax relief for farms for two reasons. One, people did feel that farming is a hard job with a volatile income and that we should be not adding extra pressure to farmers at this point. But the second, there was also a concern about food supply. People felt that taxing farmers might disrupt their businesses and cause them to close, and that might actually end up harming food supply and increasing food prices.
So there was definitely a lot of concern about that. So I think I think it's reasonably likely that the public will be quite supportive of farmers ensuring that they are not hit too hard by the tax relief. And we see this in the pressure on the government since to make some changes that potentially protect some farmers, but maybe still try and target investors.
MH: So with farmers, did people see the difficulties in terms of agricultural land being bought up by wealthy individuals in order to avoid inheritance tax? Did they see that as a problem?
DG: Yes, absolutely. People really did see that as a problem. And people felt that if people are just buying land specifically to avoid inheritance tax, that isn't fair. The concern is that people also felt that even if people are buying farmland to avoid inheritance tax, if they end up selling that farmland and it goes to another purpose and the farm gets broken up, then we face some of the problems that we spoke about earlier.
So people do definitely feel that specifically investors shouldn't be able to avoid inheritance tax so easily, but also felt that there were some risks to placing the tax on those investors, if that meant the break up of farms.
MH: So on the business relief that was quite popular with the public in terms of scrapping that. Is that right?
DG: Absolutely. People really felt that businesses should be paying more tax. And this is, I think, quite common across all types of taxation, but including inheritance tax. And again, for two reasons. One, people felt that larger businesses have lots of money and could pay the tax and maybe aren't paying enough tax currently.
But then also there was the sense of closing loopholes would be very important. And we know about some of these loopholes available for people to invest in businesses and avoid inheritance tax, and most notably through the tax relief available to AIM shares. And this is shares on the Alternative Investment Market, a market for sort of developing companies in the London Stock Exchange and these until the budget changes come into force, were completely exempt from inheritance tax.
And people, the well advised, could buy those shares and avoid inheritance tax completely. And the public were very opposed to this possibility. They felt that it is completely unfair that the well advised should be able to avoid inheritance tax so easily. So changing that, as the government have done, will definitely be a popular move.
So there is definitely still routes for the well advised to reduce their inheritance tax bills and again, I think this is something that the public would remain concerned about. So there is maybe more work to be done on that.
MH: So lastly, where do you think we go from here.? You know, we've seen these big changes. Do you think we'll see any more changes or what might the reaction be from other political parties?
DG: So I think putting farms aside with the farm debate is very much alive and may, we may see some changes in the coming weeks or months to that. But looking more broadly at inheritance tax in the future, I think for now these are pretty significant changes to inheritance tax. And it's reasonably unlikely that the Labour government will revisit this, this Parliament, unless making some tweaks.
But I wouldn't be too surprised if the debate around inheritance tax continually ramps up as the value of inheritance becomes a greater economic force in our society and the inequalities in inheritance really comes to play a large part in people's fortunes.
MH: Great. Thanks, Dan, for all of your, insights and thoughts and sharing what you've been doing in terms of chatting to the public.
DG: Thanks so much for having me. Really appreciate it.
MH: And thanks to all of you for listening to the Financial Fairness podcast. If you liked this episode, please like and share, and don’t forget to subscribe to the series through your platform of choice. Until next time, thanks for listening.