The Institute for Fiscal Studies (IFS) has put forward proposals to close various inheritance tax (IHT) loopholes, suggesting that such reforms could generate hundreds of millions of pounds in additional revenue for the UK Treasury. The think tank highlights that the current IHT system is complex and contains numerous reliefs and exemptions that disproportionately benefit wealthier individuals, leading to a perception of unfairness and opportunities for tax avoidance.
Among the key areas identified for reform are agricultural property relief (APR) and business property relief (BPR). These reliefs allow certain assets, such as farms and shares in unlisted businesses, to be passed on without incurring IHT, or with a reduced liability. The IFS argues that while these reliefs were initially designed to prevent the break-up of family businesses and farms, their current application often extends beyond this original intent, allowing substantial wealth to be transferred tax-free.
The report suggests that by tightening the criteria for these reliefs, or by introducing caps on the value of assets that can qualify, the government could significantly increase its tax take. For instance, reforming BPR to focus more narrowly on truly productive assets, rather than simply holding company shares, could prevent some wealthier individuals from sheltering their assets from IHT. Such changes would primarily affect those with significant agricultural land holdings or substantial business interests.
Contextually, IHT is levied at 40% on estates valued above the nil-rate band, which is currently £325,000 per individual, or up to £650,000 for married couples and civil partners. An additional 'residence nil-rate band' can apply, further increasing the tax-free threshold when a main home is passed to direct descendants. Despite these thresholds, only a small percentage of estates pay IHT, but the revenue generated is considerable, reaching approximately £7.5 billion in 2023-24, according to HMRC figures. The IFS proposals are aimed at ensuring that those with the largest estates contribute more equitably to public finances.
The Bank of England's ongoing focus on managing inflation and the broader economic climate means that any measures to boost government revenue will be closely scrutinised. While these proposals are not directly linked to monetary policy, increased government revenue could provide greater fiscal flexibility, potentially influencing future spending decisions or the need for other tax adjustments. For the FTSE 100, impacts would likely be indirect, possibly affecting sentiment towards certain sectors if changes to wealth transfer rules are perceived as creating economic uncertainty or impacting investment decisions among high-net-worth individuals.
The implications for UK households and businesses would vary. Wealthier families with significant intergenerational wealth transfer plans, particularly those involving businesses or agricultural land, could face higher tax bills. This might prompt a re-evaluation of estate planning strategies. For the broader economy, the additional revenue could theoretically be used to fund public services or reduce the national debt, potentially alleviating pressure on other areas of taxation. However, any changes would need careful consideration to avoid unintended consequences for genuine family businesses and agricultural enterprises.