Earlier this month, the Scottish National Party’s Westminster treasury spokesperson Alison Thewliss said: “The current system of inheritance is not fit for purpose, with loopholes allowing the wealthiest individuals to avoid paying their fair share. It is high time inheritance was devolved so that the Scottish government could deliver a system designed to meet Scotland’s needs. In the meantime, the SNP will continue to lead the fight against tax avoidance at Westminster.”
Some aspects of income tax have been devolved to Scotland. However, inheritance tax (IHT), along with certain other taxes, remains with the UK government and applies uniformly across the country.
IHT taxes estates on death and lifetime gifts at 40 per cent. The first £325,000 of an individual’s estate is taxed at 0 per cent. Some estates may benefit from a further £125,000 taxed at 0 per cent where residential property is involved.
Receipts from IHT have been increasing in recent years on the back of property values and buoyant stock markets. HMRC figures stated a record £5.2 billion raised in the financial year 2016/17, with Scotland accounting for £283 million.
Following the 2014 independence referendum, all major political parties participated in the Smith Commission and although one of the agreed outcomes was that IHT would remain the responsibility of the UK government, it would appear that the SNP is now taking a very different view.
IHT is a notoriously complex tax which is difficult and expensive to administer. A tax system should be easy to understand and taxpayers should be clear on their obligations. If a Scottish government had the courage to sweep away complicated measures, many would welcome a new regime. But a separate IHT regime for Scotland could also present challenges and, potentially, yet another layer of complexity.
Currently, the determining factor placing someone in the UK IHT net is the concept of his or her domicile. There would be many cases where establishing if someone’s permanent home was in Scotland or elsewhere in the UK would be problematic and it would not be in anyone’s interest to deal with two separate tax authorities.
The difficulty in establishing whether someone would be liable for Scottish IHT or UK IHT might need to be resolved by establishing a whole new system for Scotland, perhaps based on long term residence. Significant differentials in the amount of IHT paid between Scotland and elsewhere in the UK could act as an incentive for people to relocate to where they perceive their family’s best interests lie.
Some press coverage has speculated that the SNP may have been particularly concerned at the special tax treatment for business property, where certain types of asset receive 100 per cent relief from IHT after they have been owned for two years – for example, interests in a sole trader business, or shares in unquoted trading companies.
The UK government extended this relief to shares in trading companies quoted on the Alternative Investment Market (AIM) to encourage investment in entrepreneurial business. Portfolios consisting of shares in such companies are offered by specialist investment managers, with a view to building up a financial resource which is IHT-free. But AIM investment is generally regarded as not for the faint hearted due to the increased risk and volatility at play.
A loophole is an ambiguity or inconsistency which is then exploited. Is investing in AIM, when tax rules specifically offer 100 per cent relief from IHT, a tax loophole? It depends on which side of the political fence you sit. Removing business relief from all AIM quoted shares would raise welcome extra tax revenue. But the prospect of a 40 per cent tax bill might result in investors reducing backing to small and growing businesses, just when the wider economy needs them to flourish most.
Colin Henderson, partner, private client services, Anderson Strathern LLP