The Office of Tax Simplification (OTS) recently issued its second report on inheritance tax (IHT). A number of the changes suggested by the report have the potential to have a particular impact on land and rural business owners, as noted below.

The remit of the OTS is simplification rather than policy so significant change or abolition of reliefs is outwith their scope. In addition, the OTS only makes recommendations - it is for the government to make changes to the law.

The OTS recommendations

The test for BPR

Where a business has diversified away from agriculture, agricultural property relief (APR) is not available, but business property relief (BPR) may be. BPR only applies where the business is wholly or mainly trading and not simply investing in land. The test is currently 51% (trading)/49% (investment). The OTS recommends a much higher, 80% (trading)/20% (investment) test. This could remove BPR from the reach of many diversified land and rural businesses.

However, restructuring may be possible, for example hiving off investment elements, which would protect BPR for the trading elements of the business.

Furnished holiday lets

HMRC do not like to give relief from IHT to furnished holiday lets. BPR currently applies only if a very high level of services is provided such that the holiday lets can be seen as a trading activity and not an investment in land and buildings. There is a lack of clarity on what this means, which has led to a number of 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 which includes such activities. If the 80/20 rule is brought in, then furnished holidays lets will support the higher 80% trading requirement.


Farmhouses can qualify for APR from IHT. However, the farmer requires to reside in the farmhouse and run the farm from there. This can prejudice farmers who have to go into hospital or into a care home as APR can be denied on the farmhouse. At present, HMRC considers such matters case by case. The OTS recommends that HMRC are more sensitive to such situations and provide more clarity around their tests for eligibility in these cases.

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 capital gains tax (CGT), but (usually) no IHT. Assets given on death incur IHT, but no CGT (termed the CGT-free uplift on death). The OTS notes that differences between the two taxes can complicate and even delay the decision to give assets away in lifetime.

The OTS recommends that government consider the interaction of the taxes such that where there is relief from IHT on death (including APR and BPR but also other reliefs), the CGT-free uplift might not apply. This would avoid the current situation where a beneficiary can immediately transfer on those assets with no CGT consequence.

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 then there is a reduction in the IHT rate, called taper relief.

The OTS recommend that taper relief be removed, but that one need only survive for five years after making a gift. A taxpayer might therefore have a better chance of surviving the gift and the tax rate being zero. However, if the taxpayer does not survive long enough, then there will be more tax because there is no taper relief.


Current IHT reliefs are generous. The report states that APR and BPR cost the Treasury £1 billion per year in lost tax take. Reliefs may seem an easy target for raising tax intake and something future government may consider reviewing. However, HM Revenue & Customs research concludes that APR and BPR are used for their intended purpose of avoiding businesses and farms/estates being broken up to pay IHT. That may be a positive endorsement in favour of the reliefs remaining in place.

If you have in mind to do succession planning or to restructure your business then now is the time to do that, while the reliefs allow for changes to be made in a tax efficient way.


Leigh Gould