In its response to a government consultation on IHT relief reforms, ICAEW said that, if implemented, the IHT proposals would cause greater hardship for owners planning to pass on their business after death, as their estates would have to fund an unforeseen 20% IHT liability under the plans. In addition, as the policy intention is to exempt three quarters of all estates, ICAEW thinks that the £1m exemption allowance is too low and many more estates will be caught than intended. 

The proposals – which mark the first change to the rules in over 30 years – could result in the demise of multi-generational businesses which would have to be broken up to cover tax obligations, hindering prospects of economic growth across many communities and stripping away policy certainty that allowed owners to plan ahead, the Institute added.

Katherine Ford, ICAEW Technical Manager, Tax, said: 

“These unfair inheritance tax proposals will result in greater hardship for business owners who are elderly or in poor health, and will threaten the future of multi-generational businesses.

“These changes would also thwart economic growth, given the detrimental impact this tax policy would have on many communities. The loss of policy certainty and stability, which has lasted for a generation, will undermine the ability of these family businesses to plan, resulting in severe consequences for UK business and the agricultural sector. With certainty now gone, business owners will be left to scramble with short notice – that is no way to design policy.

“At £1million, the allowance is also not sufficient and could jeopardise the viability of businesses and family farms if not increased.”

ICAEW explained that if elderly, unwell or terminally ill owners were able to make lifetime gifts now to avoid paying IHT, it is unlikely they’d survive the seven years needed for the gift to be exempt. To address this issue, the Institute has suggested that there could be a taper for gifts during the transitional period, or a transitional relief for active business owners and farmers over the age of 65, to allow them to make gifts to family members without the need to survive seven years.

Additionally, the £1m allowance should be increased annually in line with inflation. 

The rules must also ensure the allowance can be transferred between spouses to reduce any unnecessary complications for taxpayers, such as the costly redrafting of wills or the need for post-death variations, the Institute added.

The measure is also disproportionate for the owners of smaller businesses that exceed valuation threshold but who cannot afford expensive tax planning advice and trusts, ICAEW said.

Shareholders face a double tax headache

ICAEW said paying the tax would be a “practical problem” for businesses and farmers, even if payable over 10 years.

But there is a bigger problem for shareholders in family companies who rely on business property relief, the Institute explained, as there is a potential double tax charge if families need to sell company assets and extract funds to pay the IHT.

Any distribution to shareholders needs to leave the estate with enough cash, after both corporation tax and income tax, to pay IHT, ICAEW warned. If key business assets need to be sold to fulfil these payments, with any gains subject to tax, then it could harm the viability of the business.

A solution to this, ICAEW argued, could be to extend legislation around the company purchase of own shares.

Financial burden mounts for business owners

ICAEW said these rules would result in the need for more professional valuations – instead of estimates – to be obtained, adding to the financial burden for taxpayers.

Smaller businesses and farms whose valuation are close to the £1m allowance are likely to be disproportionately affected by HMRC valuation enquiries, the Institute said.

To lessen the burden, the government must make it clear how long a valuation will be considered valid, and properly resource the IHT valuation team at HMRC so that estate administration and the granting of probate is not delayed by challenges to valuations, ICAEW said.

ENDS 

Notes to editors: 

1. The full consultation response is available on request.