Anyone who has received an inheritance will be aware that the rules surrounding tax after death are complicated. In 2018, the Chancellor asked the Office for Tax Simplification (OTS) to review Inheritance Tax (IHT) legislation and to recommend improvements that could be made to streamline the tax system. On 5 July 2019, the OTS published its second report. Suggestions included replacing current exemptions with an overall ‘Personal Gifts Allowance’, and reducing the time needed between gift and death for an asset to fall outside of an estate from 7 years to 5 years, with no taper relief.
The key areas for farmers, rural businesses and landed estates are:
Capital Gains Tax (CGT)
Assets are inherited for Capital Gains Tax (CGT) purposes at the market value on death, so that increases in value are free of CGT. This rule encourages people to hold on to assets rather than gift them in life, which can negatively affect the farming business. The OTS report suggests that if an asset is subject to an IHT relief, this CGT-free valuation uplift could be removed, to incentivise more farmers to make lifetime transfers of assets.
Bad news: IHT rules could be changed to follow CGT rules
Currently, 100% IHT relief can be obtained when the activities of a business are wholly or mainly trading in nature. This generally means that more than 50% of all activities are trading. It’s suggested that the IHT rules should be the same as CGT rules, which generally require more than 80% of the activity to be trading. If HMRC decide to follow the suggestion, it could lead to a complete loss of Business Property Relief for many farmers, where diversification and non-trading activities such as rental properties are significant. Careful reviews of assets, ownership and activities will be needed.
Good news: Holiday lets would qualify for 100% IHT relief
Holiday lets can be an excellent way for property owners to generate new sources of income. Currently, furnished holiday lets are generally treated as trading for Income Tax and CGT purposes, but as investments for IHT purposes. The proposals would see these rules aligned. Genuine furnished holiday lets would then also treated as trading for IHT purposes, qualifying for 100% IHT relief.
Farmhouses: Ill health and Agricultural Property Relief (APR)
Presently, if a farmer has to go into long term care then APR may not be available because the farmhouse may not be occupied for agricultural purposes immediately prior to death. The OTS suggests that the eligibility tests in such circumstances need to be clearer and more transparent.
Are formal valuations necessary?
The OTS also identified a lack of clarity regarding when formal valuations are required. These valuations can be expensive, so when no IHT is due, a full formal valuation appears to be unnecessary. The OTS called for HMRC to provide guidance as to when a formal valuation is required.
Overall, there are good proposals in the OTS report. However, if these suggestions are taken on board, you will need to carefully plan to ensure the value of reliefs is maximised. Whenever there are changes, it is important that you seek guidance on the implications. For advice on these proposed changes, or any IHT planning advice, please contact Joanne Wright on firstname.lastname@example.org or 01536 646000. Alternatively please have a look at our market-leading farming and agricultural accounting service.