What does this mean for you?
Inheritance tax (IHT) (the tax paid on the value of assets left on death) in its current form was introduced in 1986 with the concept of protecting poorer members of society by redistributing wealth from inherited legacies. While fewer than 5% of estates are liable to IHT, there has been an increase in the number of people within the scope of the tax, mirrored by the tax take – HMRC receipts from IHT stood at £4.84bn in 2016/17, up from £2.396bn in 2009/10.
There are some especially complex areas in the current IHT legislation including business and agricultural property relief (BPR and APR), trusts and the new residence nil rate band. For those that qualify, the latter increases the total possible allowance for a married couple to £1M. However, many have commented that the complexity in the criteria for qualifying should be removed.
Earlier this year Philip Hammond asked the Office of Tax Simplification (OTS) to review the tax to make sure it is ‘fit for purpose’ and to identify simplification opportunities in terms of tax and administration. As a result the future direction of IHT could change.
Whist IHT is a complicated area, particularly for farms and estates, it is an area those specialising in the taxation of farms and estates understand. We spend a lot of time with our clients advising on succession with the aim of protecting the family property for future generations to run a viable business.
The aim of BPR and APR was to enable entrepreneurs to pass on their businesses on death without it being disturbed by the payment of tax. However, the unintended consequence is that wealthy individuals invest in land and businesses qualifying for APR and BPR in order to avoid IHT. Therefore this is an area that is being scrutinised in the OTS review.
We could see HMRC legislating on whether a business is wholly or mainly trading for the purposes of qualifying for BPR. Currently if a business is mainly trading (i.e. farming) it is possible to benefit from the relief on investment (let) property in a business. The wholly or mainly test is currently based on a 50% trading requirement. For capital gains tax purposes, to qualify for entrepreneurs and holdover relief, there is an 80% trading requirement. Therefore we could see the two taxes aligned.
The OTS Call for Evidence document also suggests they are reviewing the use of contract farming, and presumably share farming and grazing licenses, to benefit from APR and BPR. There is an indication they are considering the replacement of APR by BPR. This would have far reaching consequences for landlords of farm property as well as the taxation of farmhouses.
Another area under scrutiny is lifetime gifts. This area of IHT is complicated and often misunderstood with problems arising on death when tax has to be paid on a lifetime gift. This is an area where simplification would be welcomed and there are opportunities to increase the existing gift exemptions, including the annual exemption of £3,000, which has not increased for 30 years.
With much uncertainty in the rural environment and the need for farms and estates to increase income and profitability, particularly given the likely decrease in BPS entitlements, another welcome change would be to recognise the need for diversified farm and estate businesses to qualify for IHT relief.
This should include furnished holiday letting activities which currently do not qualify for IHT relief but are an important part of the overall farm or estate business.
Succession is not an easy discussion but bearing all the above in mind there has never been a better time to get it on the agenda. The current reliefs should not be taken for granted and in many cases banking them now is the right decision.