Inheritance Tax – The Death of Taxes
For a piece of legislation that has been in existence since 1984, you might be forgiven for thinking that there are very clearly defined parameters when considering your potential Inheritance Tax liability.
With the lifetime allowance frozen at £325,000 until April 2015, it may be worth reviewing previous arrangements.
Agricultural assets have long been regarded as a safe haven for IHT purposes. This may not always be the case. Agricultural Property Relief (APR) is available after 2 years of owner occupation, or 7 years if leased, subject to other qualifications. For farming businesses, you might consider Business Property Relief dependent on the structure of legal ownership and the use of the assets.
Any Agricultural Holdings Act 1986 succession tenancy post 1 September 1995 should qualify for 100% relief. You might consider negotiating a succession with the Tenant to increase the rate from 50% to 100%, although beware of the potential for Stamp Duty Land Tax and potential Capital Gains Tax issues. Other issues will need to be addressed including a review of the improvements carried out to the holding to ensure these are properly recorded.
When a tenant surrenders his tenancy, HMRC may take the view that a disposal has taken place for CGT purposes, and if the lease has a value a capital gain will arise. If there is a gain it should be possible for the tenant to claim rollover relief against the acquisition value of the new tenancy.
Many agricultural holdings have diversified taking advantage of new opportunities and to develop different income streams. It would be sensible to review if these assets qualify for any form of relief, and identify ways of mitigating the tax liability. Typically these might include Buy to Let portfolios, Furnished Holiday Lets or other leisure based enterprises.
There are a number of measures you might consider to mitigate your liability, including making Potentially Exempt Transfers (PETs), lifetime gifts, or forming Trusts for the transfer of wealth into the next generation.
The RICS Rural Land Market survey reported that farmland prices reached an all time high in the first half of 2011. For schemes that were put in place a few years ago, it may be worth reviewing the extent of the liability on non or partially qualifying assets. This may trigger a review of life assurance cover as well.
It is clear from the spate of recent IHT cases that landowners need to be light on their feet and adapt to changing legislation and case law. Where Trusts are in place, a review of the IHT position should be a regular feature on all agendas.
In practice, on a day by day basis, it is too easy to pass over this issue; never has it been truer that IHT is a ‘voluntary tax’.