Barker Gotelee

For those who want to pass on family farms and businesses to the next generation it is important to have some knowledge of inheritance tax (IHT) and keep a weather eye on changes to how the tax works.  As we approach the election and a possibly (likely) change of government, what are the straws in the wind?

Recent Revenue statistics show a sharp drop in the tax raised by IHT from £2.83 billion/year to £2.25 billion/year.  Even more striking is the reduction in the number of households paying IHT from 27,000 to 12,000.  The main reason for this is the introduction of the transferable IHT allowance from the estate of the first spouse to die to the estate of the surviving spouse.  The effect of this is that the estate of the second to die can have a tax free allowance of up to £650,000.

It is intriguing that the reductions in tax raised have taken place under a Labour government at a time when the Treasury is desperate to raise revenue by any means possible.  The introduction of the transferable allowance has released many families from the burden of IHT without having to undertake expensive or complicated tax planning.  The tax taken from IHT and the number of people affected by IHT had increased dramatically since 1997 because of the increase in house prices.  The transferable allowance has reduced the number of people affected by inheritance tax below the 1997 level.  The immediate thought is that the Revenue and Treasury are likely to look for some way to increase the tax collected from IHT.

For farmers and people in family businesses, the vital reliefs are agricultural property relief and business property relief which can virtually free a family farm or a family business from the burden of inheritance tax if the business is structured correctly.  It is vital to review the structure periodically to make sure that maximum advantage is being taken of these reliefs.  There is always the worrying prospect that at some point the Treasury will consider the reliefs are too generous and will reduce them.

If the Conservatives win the election next year, what have they said about IHT?  Firstly, shadow Chancellor George Osborne has said that they will increase the IHT free allowance to £1M (currently £325,000).  Secondly, he has said that they will retain the provisions allowing transfer of IHT allowances between the estates of spouses.  This opens up the possibility of a couple having an allowance between them of £2M which could be used against the estate of the second to die.  This would reduce the number of people affected by IHT to a very low level.  However, George Osborne recently indicated that although the Conservatives were committed to increasing the IHT allowance to £1M, it is not likely to happen until the end of the next parliament.  Watch this space…

James Skellorn

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