Personal Law

Recommendations to replace inheritance tax (IHT) have been published by the All-Party Parliamentary Group on Inheritance and Intergenerational Fairness (APPG). Changes suggested by the report have the potential to impact land and rural business owners.

The recommendations

Rate of tax

Currently, IHT is charged at 40%. The APPG recommends that IHT be payable at a lower rate of between 10% and 20%. This seems to be good news, but the report then goes on to recommend that existing IHT reliefs be removed.

Removal of reliefs

Land and rural businesses can often qualify for reliefs from IHT, through agricultural property relief (APR) and business property relief (BPR). The policy behind these reliefs is to avoid businesses being broken up to fund inheritance tax, potentially leaving behind businesses which are then commercially unviable. These reliefs are valuable as they allow land and rural businesses to pass to the next generation on death, without the disruption of a tax bill.
The APPG recommends that BPR and APR be removed.

The heirs of those land and rural business owners who currently qualify for 100% APR or BPR will have to find the cash to pay the tax on their inheritance, unless they do other planning. That may mean that the business has to take on debt or sell parts off to fund the tax.

Those with land and rural businesses which do not currently qualify for 100% APR or BPR may benefit from a lower rate of tax on those assets, if reforms are made.

Removal of CGT free uplift on death

Heirs currently inherit land and rural businesses left to them on death capital gains tax (CGT) free. The capital gains built up during the owner’s lifetime are wiped out on their death and the heir inherits the asset with no capital gain. This tax relief can encourage land and rural business owners to retain assets until they die, rather than handing them on in their lifetime (and thereby potentially incurring a CGT bill).

The APPG recommend that this relief be removed, so that on a sale by the heir, CGT would be payable. This might make a gift in lifetime rather than on death more attractive.

Background to reform

The APPG report comes on the back of:-

• the Office of Tax Simplification report on Inheritance Tax, on which we have blogged here
• the think tank Resolution Foundation report upon which we have blogged here
• HMRC research upon which we have blogged here

Considerations for the future

The remit of APPG is to facilitate discussion, and it only makes recommendations. It is for the government to make changes to the law.
However, the report is a reminder that current tax reliefs are generous and may not be with us forever. If you are intending to carry out some succession planning or to restructure your business then now may be the time to do that, while the reliefs allow for changes to be made in a tax efficient way.
For more information or to discuss this in more detail please contact Leigh Gould or your usual Brodies contact.

Leigh Gould