Last year, The Office of Tax Simplification (OTS) issued its second report on inheritance tax (IHT), outlining five recommendations that could impact on the way in which farming businesses claim tax relief.
So what are they and what might they mean for your business?
1. A higher BPR test
Where businesses diversify from agriculture, Agricultural property relief (APR) is not available, but business property relief (BPR) may be, if the business is wholly or mainly trading and not just investing in land. The test is currently 51%trading/49% investment. The OTS recommends a much higher 80/20%, test, which could remove BPR as an option for many diversified farming businesses.
2. Furnished holiday lets
BPR currently only applies if a holiday let can be seen as a trading activity and not an investment in land and buildings. There is a lack of clarity on this, which has led to numerous court cases.
The OTS recommends that furnished holiday lets be treated as trade for the purposes of BPR, as they currently are for Capital Gains Tax (CGT) and income tax. This would be good news for a business that includes such activities. If the 80/20 rule is introduced, furnished holidays lets will be eligible for the higher 80% trading requirement.
3. Farmhouses and APR
Farmhouses can qualify for APR from IHT. However, the farmer must reside in the farmhouse and run the farm from there, which doesn't account for those who go into hospital or care. Although HMRC reviews on a case-by-case basis, APR can be denied. The OTS recommends that more sensitivity is shown in these situations and HMRC provides more clarity around its eligibility tests.
4. Gifts on death or in lifetime
There are two capital taxes payable on the transfer of assets - CGT and IHT. Assets given away outright in lifetime incur CGT, but usually no IHT. Assets given on death do incur IHT, but no CGT (a.k.a. the CGT-free uplift on death). Differences between the two taxes can complicate and even delay decisions to give assets away in lifetime.
The OTS recommends that the Government considers the interaction of the taxes, so that where there is relief from IHT on death (including APR and BPR and other reliefs), the CGT-free uplift might not apply. This would avoid the current situation where a beneficiary can immediately pass on those assets with no CGT costs.
5. Surviving a lifetime gift
To remove value from your estate for IHT purposes, you need to survive seven years after making a gift. If you make a large enough gift and survive for three to seven years there is a reduction in the IHT rate, called taper relief.
The OTS recommends that taper relief be removed, but an individual need only survive for five years after making a gift. A taxpayer may, therefore, have a better chance of surviving the gift and the tax rate being zero. However, if the taxpayer does not survive long enough, there will be more tax because there is no taper relief.
While the OTS makes recommendations rather than actual changes, it is worth bearing in mind that modifications to tax reliefs is an easy way of raising tax intake and therefore something the Government may consider reviewing. On the other hand, HMRC views APR and BPR as playing key roles in the avoidance of businesses being broken up to pay IHT - which may swing the decision in favour of the reliefs remaining in place.
If you're considering succession planning or restructuring your business, now is the time to do it - while the reliefs allow for changes to be made in a tax efficient way.
This article first appeared in Farming North.