£1.8 billion of inheritance tax business relief went to just 68 businesses in 2020-21, new freedom of information request reveals

A few dozen multi-million pound estates are benefiting from the lion’s share of business relief granted on inheritance taxes, new FOI data reveals today.
 
Just 68 estates - all with business assets worth over £5 million - collectively benefitted from inheritance tax business relief on £1.8 billion of assets in 2020-21, Demos analysis of the FOI data reveals. On average, each held £27 million of property assets benefitting from the relief, meaning they were not counted for inheritance tax purposes.
The other 3,312 estates benefitting from the relief - those with business assets under £5 million - claimed it on just £1.4 billion of assets collectively (£420,000 each on average). This means the top 2% of claimants accounted for 57% of the assets benefiting from the relief. This analysis is part of Demos’s wider work on inheritance, which is funded by abrdn Financial Fairness Trust.

The figures raise questions about whether the relief provides value for money, rather than mainly providing opportunities for the wealthy to reduce inheritance tax bills, the think tank’s researchers argue. This comes on the back of recent reports suggesting that Labour may make changes to business relief if they form the next government.

The relief was introduced to prevent businesses being broken up to pay inheritance tax bills. Yet, 80% of the relief now applies to shares in unlisted traded businesses (generally smaller companies whose shares aren’t listed on the open market). The government extended the relief to these shares in 1992 on the basis that they were less liquid (harder to sell quickly) than other shares, meaning owners may not be able to sell them to pay for inheritance tax bills. However, given how the market for these shares has changed since then, it is no longer clear that this is the case. For example, the Alternative Investment Market (the sub-market of the London Stock Exchange for unlisted companies) included just ten companies in 1995, but had 738 by the end of March 2024 (including 101 overseas businesses, as of February 2024). The value of trade on the market has also increased dramatically since its formation. This suggests the shares would be more liquid, and the basis for the relief may no longer hold.

The figures from HMRC do, however, make clear that the relief allows the wealthiest estates to reduce inheritance tax bills, according to Demos. In part because of this, the wealthiest estates pay lower rates of inheritance tax; the average effective rate peaks at 25% for tax-paying estates worth between £2m and £7.5m, but falls to 17% for those over £10m. 

The proportion of relief claimed by estates with the highest-value business property has also increased year-on-year. While estates with over £2.5 million of business property accounted for 53% of the total relief claimed in 2019-20, they accounted for 69% in 2020-21. The total value of assets benefiting from the relief also increased by 72% year-on-year.

Note, the value of property benefiting from the relief is not reflective of the cost to the Exchequer. If the relief was scrapped, only the value of property over and above other allowances and relief would be taxed, and subject to a 40% rate. The cost to the Exchequer is estimated at £1.2 billion for 2020-21.

Dan Goss, senior researcher at Demos leading the work on inheritance tax, said: 
“We see business relief becoming an increasingly costly tax exemption, and one going primarily to very large businesses. The relief was introduced to protect businesses from breaking up due to inheritance tax bills. 
“While it is no longer clear how much the relief does in fact protect businesses, it clearly comes at a significant public expense, at a time when the state is struggling for resources. The government should review whether the current design still provides value for money. 
“The government could look to international systems. The UK is in a small minority of OECD countries to offer 100% uncapped inheritance tax relief for some forms of business. Aligning more with other OECD countries could potentially deliver better value-for-money for the British taxpayer.”

Mubin Haq, CEO of abrdn Financial Fairness Trust, said:
“The public are concerned that inheritance tax is plagued by tax avoidance and loopholes which primarily benefit the wealthiest in society. That just a small number of businesses benefit from the lion’s share of inheritance tax business relief will reinforce public concerns that there is not a level playing field. This undermines support for inheritance tax which plays a small but vital part in financing our public services.”

Arun Advani, Associate Professor of Economics at the University of Warwick, said:
“Inheritance tax is littered with special exemptions. Just four of these reduce the tax take by over £4 billion. If there are concerns about the protection of small family businesses, we could cap, rather than scrap, business relief. Introducing a cap of £1 million per couple, on top of the standard tax free allowance, would raise £1.4 billion in the current year while making the system fairer. Removing the relief for arms-length AIM shares, which are clearly not family businesses, would raise £1.1bn in the current year.”