UK: Farm and business inheritance tax reliefs double in five years
28 March 2014
Posted by: Authors: Vanessa Houlder and Kiran Stacey
Authors: Vanessa Houlder and Kiran Stacey
The cost of exempting agricultural land and businesses from inheritance tax has more than doubled over the past five years, according to a report by the government’s spending watchdog.
Margaret Hodge, who chairs parliament’s public accounts committee, urged ministers to get "a much tighter grip on the use of reliefs in the tax system” after the report by the National Audit Office found that there were at least 1,128 tax reliefs. It said those with similar aims to spending programmes were worth more than £100bn each year.
Ms Hodge said: "Despite good intentions, every one of these reliefs is an opportunity for abuse or fraud. It is shocking that HMRC [HM Revenue & Customs] knows this and yet there is still no systematic evaluation or monitoring of whether reliefs are working as intended.”
The report sparked an angry response from the Treasury which said the design and impact of reliefs were outside the remit of the audit office.
It said: "The NAO does important work in holding departments to account over their spending but it is for ministers and parliament to make decisions about the targeting and purpose of tax reliefs.”
The audit office found that tax reliefs cost seven times the value of the inheritance tax that is collected. Over half of estates big enough to pay inheritance tax escape it because of reliefs and exemptions, the most important of which is the ability to pass assets on tax-free to a surviving spouse.
The audit office’s findings come as inheritance tax – one of the most politically contentious of all taxes – has risen up the political agenda.
George Osborne helped persuade Labour to call off a planned election in 2007, when he was shadow chancellor, by announcing a policy to move the threshold for paying the tax up to £1m. Labour worried that this would be so popular in marginal constituencies that it could cost them the election.
The Conservatives have decided not to push forward with that policy while in power – although this week David Cameron suggested that he could revisit inheritance tax in the next parliament.
Agricultural and business property reliefs, which are expected to cost the Treasury £800m this tax year, up from £345m in 2008-09, are aimed at ensuring that family businesses and farms do not have to be broken up and sold to pay inheritance tax.
They are commonly used by wealthy families to reduce or escape the tax, although lifetime gifts are another, more important factor.
The audit office said the reliefs were "relatively easy to use” by tax planners. Its report said the tax reliefs were often essential but likely to put significant sums at risk from abuse.
Stephen Herring, head of taxation at the Institute of Directors, said any move to tighten the rules would have a "devastating impact”, causing widespread disruption by forcing business and estates to liquidate assets.
He said inheritance tax planning played a particularly important role in the forestry industry but was a less important driver for purchases of agricultural land than the attraction of living in houses surrounded by a lot of land.
The audit office said there was no policy reason for the increased cost of the two inheritance tax reliefs. Much of the increase was likely to reflect rising asset values. Agricultural land has increased in value 270 per cent over the past decade according to Savills, a property consultancy.
Two out of five estates valued at more than £1m do not pay inheritance tax while the remainder paid an average of £476,000, according to HMRC statistics. The proportion of estates over £2m that are untaxed has risen from 30 per cent in 2007-8 to 40 per cent in 2010-11.
Rising house prices and the effect of freezing the inheritance tax threshold until 2018 are set to push up the number of estates liable for inheritance tax over the next five years, from just under one in 20 to just under one in 10, according to the Office for Budget Responsibility.
The OBR forecast last week that inheritance tax receipts would grow an average of nearly 11 per cent a year between 2014-15 and 2018-19, when they would yield £5.8bn.
This article first appeared on www.ft.com.