IHT – a new hope?
Back in 2014/15, I baffled an audience in Hong Kong by explaining that Star Wars was all about a dispute over taxes*.
To be fair, I was supposed to be talking about the changes to UK property taxes that had been announced over recent years (ATED, 15% super-rate SDLT etc) and were about to come in (the first salvo of NRCGT).
I think for those investors / intermediaries who were clinging onto their pre-2012 UK tax briefing notes like a manky comfort blanket, it may as well have been Jar Jar Binks on stage.
Never mind, it had also surprisingly clashed with the Hong Kong 7’s week. What a coincidence…
Where was I?
Yes, Star Wars.
It seems we have a modern-day tax war.
Ahead of the election, the battlelines are well and truly being drawn in policy units or, as I suspect, at The Times and Telegraph Towers.
The main battle is over IHT but with some more minor skirmishes around wealth taxes and other capital taxes.
So, what is the Sunak led Empire plotting?
How is the rebel alliance – led by Princess Keir – dealing with the threat?
The Tories strike back?
Over last weekend there were a series of stories, initially in the Sunday Times, that the Conservative party plan to potentially abolish IHT.
This is perhaps a culmination of campaigns headed by Nadim Zahawi (remember him and his tax travails?) and the Telegraph earlier in the year.
IHT is dubbed, at least by papers such as the Times and the Telegraph as “the most hated tax in Britain”.
This seems hard to believes as less than 4% of estates pay any IHT. So, how is it more hated than income tax? As one unnamed source said, “A lot of people don’t know that they won’t pay it”
Indeed, it is doubly unusual as most people agree that the fairest taxes are ones paid by others!
As is the way with journalists, unknown we read that unknown sources close to the government have revealed that high-level discussions are underway regarding the reform of inheritance tax.
We are told that a possible approach involves Sunak announcing his intention to gradually phase out the tax. This would commence with a reduction in the 40% inheritance tax rate in the upcoming budget in March.
Subsequently, a pathway towards complete abolition might be outlined in the years to come.
Might being the operative word.
Of course, this would make inheritance tax a prominent election issue, challenging opposition leader Sir Keir Starmer to declare his stance on future tax proposals.
This perhaps represents the second potential ambush laid for Labour on taxing the wealthy, as we will see.
Labour – the phantom menace?
Shadow Chancellor, Rachel Reeves surprisingly gave an interview to the Telegraph earlier this month.
But it is not difficult to see why.
The Telegraph had spent the last few months talking about how a Labour government would introduce a Wealth Tax.
It had fallen short of explaining how Reeves intended to introduce an ad valoreum levy on our hopes and dreams.
But the tactic was clear, ‘yes, the Tories are a state – but look at the other dudes and dudettes.’
Of course, this is a tactic that worked perfectly when it came to nailing Jeremy Corbyn and John McDonnell.
However, it might not be quite so easy to do this against Starmer and Reeves. They do not appear to be in the demagogue category.
In the interview, Reeves ruled out any form of wealth tax or increase in the top rate of income tax under a Labour government.
She said that Labour would focus on “growing the economy” to generate more tax revenue, rather than raising taxes.
In recent days, she seems to have had a malfunction which requires every second word to be ‘stability’.
Whatever that means.
In addition, Reeves also said that Labour would abolish non-dom tax status, which allows wealthy individuals to live in the UK without paying UK tax on their foreign income.
Again, other than amongst tax professionals, this is unlikely to create the ‘howls of anguish’ gleefully announced by one of her predecessors, the late Dennis Healy,
Of course, like any tax measure, scrapping the non-dom status would have behavioural consequences.
As Dennis Healy found out, the howls of anguish subsided rather quickly – and they soon pikced up the phone to Messrs Tucker and Plummer who had just set up the Rossminster tax scheme factory.
Will non-doms leave in droves if this happens?
It is noted that we have been told this at every single reform of the rules.
However, there does seem to be data suggesting that wealth is already leaving the UK to more attractive destinations.
Further, other HMRC data suggests that the number of non-doms has decreased by 11% in the tax year ending 2021. This is the largest decline since 2017 when the rules last changed
Of course, this might be due to technical reasons that taxpayers are no longer claiming the status, rather than financial flight.
A lot will depend on what Labour propose to replace it with. Again, there are suggestions that Labour will replace it with a reduced window for those coming to the UK. But I am not aware of any details.
But I digress (again).
Reeves’s comments are a significant departure from Labour’s previous policies, which had been more critical of wealthy individuals and businesses. The party’s shift in focus is likely an attempt to appeal to more moderate voters ahead of the next general election.
That takes us on to The Telegraph’s piece yesterday.
It has the feel of a back to the drawing board approach after they were perhaps blind-sided by Reeves’ Jedi mind trick – or, more accurately, interview earlier in the month.
As such, the Telegraph has launched a new front by suggesting that Labour plans a significant overhaul of inheritance tax.
We are told that Labour is plotting a ‘devastating’ inheritance tax raid.
However, what it appears to be is a re-calibration of tax reliefs that, most fair-minded persons, would think were on the table for reform.
Firstly, we are told that Labour is ‘closing the loopholes’ However, none of what is set out could ever be considered as loopholes.
As you may know, the misuse of the ‘L’ word is something that often gets me clambering on to my soapbox! Not today, the therapy is working.
So, let us reframe this as these proposals as reforming / reframing two existing key exemptions:
These exemptions provide for the ability farms and businesses to be passed down to the next generation without incurring the 40% inheritance tax charge that would otherwise loom large over legacies comprising of such assets. Further, such reliefs can apply to lifetime transfers.
However, I don’t think that Reeves intends to take the light sabre to these reliefs.
Merely, modify them.
Both have led to tax-saving routes that, I don’t think anyone could possibly sensibly deny, are outside of their original policy intention.
For example, the tendency of city workers buying farming piles in the country in the hope of obtaining APR. Some more successfully than others.
In terms of BPR, the issue is highlighted by my favourite client Mrs Miggins. Of course, Mrs M would have qualified for BPR in respect of her chain of successful pie-shops.
However, having sold out to Ginsters, she is sitting on a pile of cash.
As such, Mrs M invests, £1m into a basket of shares listed on the AIM, which are deemed as unquoted for the purposes of BPR and therefore relevant business property (assuming the investee company satisfies other requirements – for example, it must be a trading company).
After two years (or less if one is investing as what is known as ‘replacement property’) then the potential IHT liability of £400k is completely removed from Mrs Miggins’ estate.
There is no need to have any involvement in the business.
Just ask your financial adviser to pick the shares or the retail product containing them.
I have talked about this in some detail previously. It seems hard to fathom that this was the policy intention when BPR was introduced.
The Labour Party believes that, by tweaking these exemptions, it could yield substantial revenue—potentially up to £4 billion.
However, again, this is not a ‘devastating raid’. These are points that were also discussed in the Office for Tax Simplification’s (Rest in Peace) detailed review of IHT a few years ago.
Conclusion
Labour seems to have learnt its lesson from the Corbyn and McDonnell years and have seemingly moved quickly to head off the initial battle plans of the right leaning press and the Conservatives by outlining their intentions not to meddle with income tax or wealth taxes.
However, many will be watching to see how they will fully address the issue of IHT cuts.
Labour might rightly have a bad feeling about this…
…and take a tip from that astute political commentator, Admiral Akbar, who has stated that “It’s a trap!”
*I’d like to think it was this rather than my Yorkshire accent.
If you have any queries about this article, or tax matters in general, then please get in touch.