Time to consider Inheritance Tax

There were no major changes for the agricultural sector in the Chancellor’s Budget last month. The Scottish Budget, on the other hand, will have a more direct impact on Scottish taxpayers including the agricultural sector and is keenly awaited.

Interestingly, on the same day as the Budget, HM Revenue and Customs (HMRC) released a document entitled ‘Research into the influence of IHT (Inheritance Tax) reliefs and exemptions’.

This was a piece of independent research commissioned by HMRC to understand the motivations, behaviours and attitudes underlying the decision-making process of individuals on IHT matters and the use of reliefs and exemptions, such as agricultural property relief (APR) and business property relief (BPR), in that process.

The objectives of the research were; to understand the estate planning decisions by owners of agricultural or business assets; the influence of IHT reliefs on those decisions and what beneficiaries do, or intend to do with the inherited assets.

Eighty interviews were conducted among owners of agricultural or business assets, as well as accountants, tax advisers and solicitors who had advised on APR and BPR.

Whilst the report itself acknowledges that the findings are not statistically representative of the wider population, there are common themes that are often seen in practice.

APR may be available on agricultural assets including farmland, farm buildings, cottages and farmhouses where either the owner of the agricultural property is “the farmer” and the agricultural assets have been owned for at least two years before death or on a lifetime transfer; or where the owner is not “the farmer” and the farm has been let for at least seven years.

APR will often reduce the agricultural value of the assets for IHT purposes by 100%. In other words, the agricultural asset is effectively exempt. However, in certain circumstances the relief is limited to 50%.

BPR is also available in respect of certain qualifying businesses and business assets. The relief is again available at either 100% or 50% subject to certain conditions.

The researchers found that most individuals owning agricultural or business assets were aware of APR and BPR. Those who had been through the Inheritance Tax process were slightly more informed.

Many assumed that all agricultural or business assets would qualify for 100% relief, which was attributed to having learned about the reliefs via word of mouth.

In some cases the perceptions of IHT matters and the reliefs available may have been incorrect.

In practice, agricultural or business assets may on the face of it qualify for IHT reliefs but, as is often the case, the devil is in the detail.

For example, in certain situations, full IHT relief is not available where the land held has more than just agricultural value or where a business holds investments or larger cash sums and there is no clear business purpose for its use in the near future.

Clearly, APR and BPR are valuable reliefs which help minimise the amount of IHT payable on death or on lifetime gifts into trust. With careful planning, IHT can quite legitimately be reduced or eliminated entirely. However, be sure to plan ahead.

The very fact that HMRC are starting to review the availability of APR and BPR must mean that the future of these reliefs cannot be free from doubt.

Now may be an opportune time to dust down succession plans for your business. Are the assets held by the right people? What plans are in place to pass assets down to the next generation in a seamless transition process?

All decisions which really need to be fully discussed by business owners and their advisers in advance of any restriction in the tax rules.