Taxes are one of life’s few certainties as, increasingly, are arguments over whether the system has become too complex for its own good, belying one of its simple objectives “to help or encourage particular types of individuals, activities or products for economic or social objectives”.  

A general observation that the complexities of available reliefs are hindering rather than helping their use (or are contributing to their misuse) is being given credence by a series of consultations and surveys carried out by the Office for Tax Simplification, the Treasury, and HMRC to gauge awareness and usage.  

Reliefs on business and agricultural assets deployed to keep them intact

At the end of last year, HMRC published the results of a (albeit limited) survey into Business Property Relief (BPR) and Agricultural Property Relief (APR). The catchily titled ‘The influence of Inheritance Tax reliefs and exemptions on estate planning and inheritances’ intimated concerns that people were actively investing in assets in order to take advantage of the reliefs as part of inheritance tax planning. Although the sample was small (only 80 interviews were conducted) it was reasonably representative of individuals who owned agricultural and / or business assets, and professional advisers who might be expected to advise on BPR and APR.

The results made interesting reading: most individuals knew about the reliefs (particularly farmers who were largely aware of APR) but only had a hazy idea about how they worked. For instance, it transpired that most people thought all agricultural and business assets always qualified for 100% relief from IHT which, of course, is not the case. By contrast (and not surprisingly) the majority of the professional advisers knew and understood how to apply the respective reliefs. However, the most revealing aspect of the survey was the part that both reliefs played in estate planning: usage of both was principally to enable the handing on of the business or farm intact to the next generation. Using either relief specifically to avoid paying IHT was not a particular motivation.

Reliefs to encourage entrepreneurial activity attract new condition

In the same vein of enquiry, last summer the government consulted on those tax reliefs designed to encourage entrepreneurial activity which, it suspected, were being used to protect investors’ capital investment and not for their original, intended purpose. The three reliefs singled out for attention were EIS (Enterprise Investment Scheme), SEIS (Seed Enterprise Investment Scheme), and VCT (Venture Capital Trusts) - all of which, coincidentally, have been cited by the EU Directorate General for Taxation as among the top six of 46 schemes, promoted by EU member states, designed to encourage entrepreneurial activity.

To prevent people using these reliefs to preserve their capital, following the consultation the government has introduced another condition in two parts. First, the company’s objectives must be to grow and develop in the long term; and second, the investor’s capital must be at risk i.e. that the investor’s capital loss could be greater than the net return on their investment. By making this change, the government hopes to bring these schemes back to their original purpose, namely to support those companies ‘with high growth potential’.

So how difficult is IHT?

Finally, the Office for Tax Simplification’s consultation on IHT finished in June this year and the OTS will report on the results in the autumn. The premise for the consultation is that IHT is unnecessarily complicated for ordinary individuals to navigate when dealing with straightforward estates on which there is no tax to pay or, where there is, the calculation is (or should be) simple. The questions being asked by this consultation tap into the heart of the tax system. It exists for the greater good of society: the basis on which it is collected should be clear, the method of collection simple, and the purposes for which it is used, transparent. As soon as any tax starts to get complicated, people will, inevitably, look for ways of minimising the impact on their finances.

As the Public Accounts Committee (PAC) pointed out in 2015, “HMRC does not effectively monitor changes in the cost of tax reliefs, so is slow in identifying instances where a relief is being exploited for a purpose parliament did not intend”. If HMRC doesn’t know the value of what’s in the tax relief cupboard, it can’t really complain when others try and take advantage.

About the author

Eamonn Daly Partner

Eamonn specialises in tax, estate planning and trust advice for individuals and families providing pragmatic solutions to help them overcome complicated issues and achieve what they want to do.