Analysing The Political Economy

The Real Implication of Scrapping Inheritance Tax

By Graham Vanbergen: Rishi Sunak is fishing around for some positive focus group responses as he leaks out the information that he might scrap inheritance tax in an attempt to win some voters back and create another political dividing line with Labour, who are comfortably ahead in the polls.

The Sunday Times reported that Sunak would make way for the eventual scrapping of the levy. It is needless to say that, Downing Street has sought to play down speculation that the prime minister was drawing up plans to cut the tax. This is how leaks work when the election drum starts beating.

At present, inheritance tax is charged at 40% for estates worth more than £325,000. That sounds quite low but there’s an extra £175,000 allowance towards a main residence if it is passed to children or grandchildren. Then, it is boosted if a married couple shared their allowance, which means parents can pass on £1m to their children without any tax to pay. This inevitably makes up the majority of estates.

Just 3.7 per cent of deaths qualify to pay inheritance tax and the tax take from it is not that great at just £8 billion a year.

And yet, according to YouGov polling done for The Times, nearly a third (31%) of survey participants believe their assets would be valuable enough to pay inheritance tax. Not only that, just 5% said the threshold for inheritance tax in the circumstances above was £1m.

A third of the public is misinformed of the facts, believes something totally the opposite of reality and that is being used to garner votes.


Cynical grab for votes

Sunak was an investment banker with Goldman Sachs and then a hedge fund and investment firm. I make this point because Sunak is being at best cynical with this tax. Sunak, more than anyone in government will know that investments in AIM (Alternative Investment Market) are free of inheritance tax once that position is held for two years.

So, your quite well-off parents could invest large sums of money in AIM and when they die – the selling of the shares they bought are free of any tax at all.

At this point, no one is concerned. Except this is probably another economic Truss moment.

Approximately one-third of all shares owned in AIM are owned because of inheritance tax and if IHT is scrapped why would anyone hold shares in a more risky place than say NS&I that’s paying a 6 per cent return or the Nasdaq or FTSE?

Again, many people might not think this is a big deal. But it is.

In June 1995, the London Stock Exchange’s new entry-level platform was launched. The Alternative Investment Market, or AIM was established to help smaller companies that were seeking capital to fund growth and it expanded the scope of the Unlisted Securities Market (USM) that preceded it.

This has been an ideal solution for many companies unable to afford the costs associated with listing on the London Stock Exchange’s Main Market. AIM has offered exciting investment opportunities ever since for investors willing to invest in small, growing companies that are hungry for growth capital. In other words – many of these companies would not have expanded as they have because the cost of raising the capital required is more expensive.

And now, the raising of capital in the UK is higher than many other countries – especially in the USA.

The market capitalisations of AIM participants range from just £1 million to over £4.5 billion, and nearly two-thirds of them are domiciled here in the UK.

There are 850 companies listed and combined, they are worth well over £100 billion. They contribute around £35 billion to the UK’s GDP and directly employ over 430,000 people with all the tax that it generates. Since it started over 3,865 companies have raised over £115bn on AIM. ASOS, BooHoo, YouGov and Fevertree are some examples of AIM success stories.

So to get some votes, Sunak proposes the scrapping of IHT whilst knowing that a mass withdrawal of support for AIM shares could as Robert Peston agrees – ‘crash the market.’

And even if this doesn’t happen – many people will withdraw their cash if IHT is withdrawn, which will require many companies thinking about listing, to think about where they might want to list if raising money gets any harder or more expensive.

This is what the Brexiteers did. This is what Cameron, Johnson and Truss did. They all took extreme risks for power. None of their decisions were in the national interest. You could argue that Liz Truss believed in the economic reasons for causing an economic crash before they became so – but you could equally say that she politically argued her case to be in power because she thought everyone else was wrong on the economy.

Threatening the employment status of 430,000 people and £100 billion of company values for a few votes is astonishingly cynical. Rishi Sunak pledged to bring “integrity and accountability” as prime minister on his first day in No 10. This is neither.





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