HMRC has recently published a paper on the influence of Inheritance Tax (IHT) reliefs and exemptions on estate planning. This suggests that a future budget may contain proposals to raise more IHT by reviewing the availability of Agricultural and Business Property Reliefs (APR and BPR).
APR can give up to 100% tax relief on the agricultural value of farmland, farmhouses, buildings and assets, if owned and used for farming for two years prior to death. It is also available if the asset has been owned for at least 7 years prior to death, and throughout that period has been occupied by another for agricultural purposes. This 7 year ownership condition allows individuals to own farmland and not farm it personally. It is this relief that is most at risk as it can be exploited by non-farming individuals to shelter from IHT.
If APR were to be abolished farmers would then need to rely on BPR to reduce their IHT liability, in order for them to keep their businesses together to be passed down to the next generation.
It is often beneficial for IHT purposes for land which is owned personally and used for the purposes of a trade carried on by a partnership, of which the landowner is a partner, to be included on the partnership balance sheet. This allows it to qualify for 100% BPR as opposed to 50% when held outside the balance sheet if all other conditions are met.
Assets that are rented out, e.g. rented farm cottages, have no BPR when held outside the business. If introduced into the business it may be possible to obtain 100% BPR based on the Farmer and Balfour cases as long as the whole partnership remains wholly or mainly trading.
Currently, the “wholly or mainly trading” test is whether more than 50% of the business is trading rather than investment. The factors which are looked at are turnover, profit, asset value, time spent and in the round. An area the government could easily change to make BPR harder to achieve is to increase this trading test to 80%, which is the percentage required for Capital Gains Tax tests.
We are already seeing an increase in scrutiny from HMRC on APR and BPR claims, which are being challenged more than ever before. If you are relying on these reliefs, do take advice to ensure you meet their strict requirements and can, if required, defend claims made.
Now is a good time to review your lifetime estate planning and gifts, whilst these valuable reliefs are still available and not restricted in value. Please speak to your usual Ellacotts contact, or contact us, if you wish to discuss these reliefs