The publication of a HMRC report into inheritance tax reliefs and exemptions, followed by a request to the Office of Tax Simplification by chancellor Philip Hammond to review the IHT regime, show that the government clearly has the tax regime in their sights. Here our tax planning specialist Ian Naylor explains why agricultural and business property reliefs are under threat and why there’s never been a better time to review your tax situation.
“HMRC has published a paper on the influence of IHT reliefs and exemptions on estate planning, with a particular focus on agricultural and business assets.
There have been longstanding rumours that agricultural property relief (APR) and business property relief (BPR) will be restricted. At the moment it’s not clear whether the government will go ahead with these changes. However, now could be a good time to organise your lifetime estate planning and gifts while the reliefs are still available and not restricted in value.
APR is one of the most valuable reliefs for Inheritance Tax (IHT) as it can reduce or avoid the charge to IHT on agricultural assets of unlimited value and applies not just to those who are actively engaged in farming. In most cases this relief is 100%. It covers land in the UK, Channel Isles, Isle of Man and European Economic Area. To qualify for relief the land must satisfy one of the following: The land was owned and farmed by the deceased for two years before death. The land was owned by the deceased for the seven years before death and was farmed by someone else during that period. The second relief covers land which is tenanted or grazed. If the tenancy was granted before the 1st September 1995 the relief is 50 per cent.
One of the reasons government attention has fallen on this area is due to the significant increase in the last five to 10 years of people buying up farmland who are not farmers, inventor Sir James Dyson being just one example, so they can benefit from the current system of farm subsidies and tax benefits. This also has the effect of increasing land values often pricing actual farmers out of the market. Certainly not the original purpose of APR, which was to ensure the next generation are able to carry on farming and not face a large tax bill when a farmer dies.
Business Property Relief (BPR) provides relief from IHT on the transfer of relevant business assets at a rate of 50% or 100%. Relevant property must be held for at least two years to qualify for relief.
If APR/BPR continues to be available
- If you hold assets that might qualify for APR or BPR on your death, ideally your Will should include provision for giving those assets to a non-exempt beneficiary, such as your children, grandchildren or a trust (rather than to your spouse). It is worth considering whether it is worthwhile for you to give some of your assets away during your lifetime while these reliefs continue to exist. The only risk with this strategy is that these ‘gifts’ may incur capital gains tax.
- The individual IHT exemption is £325,000, or £650,000 between husband and wife, and if you leave your house to your descendants this amount is set to increase in 2020 subject to an overall limit in value of your assets of £2m. Capital gains tax and IHT therefore, need to be reviewed together.
- Another common issue in the case of farms is there can often be another residential building other than the farm house on site. Sometimes the ‘wrong’ person is living in each house from a tax point of view, as the farmhouse has no CGT on it, so it’s important to ensure each person is living in the property which is in their name to make sure they have private residence relief.
If APR/BPR is reviewed and looks likely to change
Although APR or BPR would not be lost if your spouse also qualifies for the relief on their death, there’s a risk the relief may change and no longer be available when they die. You would have potentially lost the opportunity to pass on agricultural or business assets to the next generation, free of IHT.
Given the amount of uncertainty at the moment we would encourage farm and business owners to undertake a review of their tax arrangements. We can review them from a legal perspective and perform a health check which would consider for example, whether they have a partnership deed in place and proper arrangements within the family for succession.
We can advise on the potential future development of your land which could make it considerably more valuable. Once you have planning permission the land value increases so at this point you may wish to consider giving it to someone in the family before the development value is realised. The development value then accrues to your children rather than to you.
We can also offer advice as to whether the use of a Trust might be an appropriate vehicle to save you tax and to protect your assets for the benefit of the family and future generations
Still have questions?
Planning your tax affairs to work as efficiently as possible can be tricky, but our dedicated tax specialists can advise on the whole range of structures resulting in savings for both you, and future generations. Contact Ian Naylor on 01538 399199 (firstname.lastname@example.org) or Rob Fearnley 01889 598883 (email@example.com) to book in for a tax review appointment.