A Systemic Fiscal Reform Group briefing by Dr. Adrian Wrigley
Currently, large inheritance tax (IHT) bills can give rise to difficulties to bereaved families, particularly where the major part of the estate is in illiquid assets such as property. Sometimes bridging loans or other arrangements are necessary before the estate can be released to the beneficiaries.
Land Value Tax to pay off inheritance Tax liability is an approach to easing the burden of paying the IHT bill by creating a Land Value Tax on the properties in the estate. A covenant on each property is entered into by the executors requiring the property owner to pay to the state a sum calculated to be fair and equitable settlement of their inheritance tax liability.
Sir James St'John passed away suddenly leaving an estate of £5,000,000 including two London properties and a country estate. His executors are presented with a bill for £1,875,200 and there are no available funds to pay.
The executors agree to enter a Land Value Covenant for £28,128/annum on each London property, and £56,256/annum on the country estate. These amounts are index linked to local land values and paid by whoever owns the property. They are roughly proportionate to the relative values of the three properties.
The Land Value Covenants are designed to be of equivalent value to the Inheritance Tax bill. Once the covenants are executed, the estate is released.
Property | Value under legacy taxation | Value with covenant | Land Value Covenant |
London1 | £1,200,000 | £730,000 | £28,128/annum |
London2 | £1,100,000 | £630,000 | £28,128/annum |
Country | £2,100,000 | £1,160,000 | £56,256/annum |
IHT bill to pay | £1,875,200 now | £112,512/annum |
It can be seen that the the market value of the properties is immediately diminished by the amount of the IHT bill. A potential purchaser is able to use much less debt, although the total annual cost of ownership is the same. Note that the precise land values for each property are rather unimportant, only that the amounts are adjusted in line with local land values. In fact the Land Value Covenants used in this way don't require any detailed investigation into the particular attributes of the plot.
The scheme could be elective (as described), or could be mandatory for estates including any property. The state could offer a choice, but give a discount for executors choosing the LVT option.
© SFR Group 2008 Paying Inheritance Tax page 1 of 1