Proposed Inheritance Tax (IHT) changes – Impact for farmers

The Office of Tax Simplification (OTS) finally released their second report into the simplification of IHT in July 2019. This report includes a number of recommendations for change.

Many farmers and landowners had concerns that this report would spell the end of Agricultural Property Relief (APR) which currently provides relief from IHT at rates of up to 100%. They will be pleased to hear that this has not been recommended! However, there are recommendations which will not be good news for some.

The ‘free uplift’ on death

The IHT reliefs available to farmers are currently very beneficial and it is not suggested that these are removed. However, the current ‘free uplift’ for Capital Gains Tax (CGT) which assets receive on death may be under threat in instances where assets are inherited IHT free.

Under current rules individuals could potentially inherit a farm IHT free, then sell within a short period of the death without paying any CGT. This is because on the farmer’s death all the assets in his estate are “re-based” for CGT purposes, i.e. the beneficiaries are deemed to acquire them at market value at the time of death. They will therefore only be liable for CGT on the increase in value of the farm since they inherited it.

The OTS recommends that the government should consider abolishing the CGT uplift on assets benefitting from IHT relief on death. This means that the beneficiary would be deemed to acquire the farm at the deceased farmer’s base cost, potentially resulting in a larger CGT liability on a future transfer.

This may not be a concern for farmers who do not have any intention to sell in future and the suggestion may have some benefits for the industry as in our experience the CGT uplift can be a major factor for farmers when considering make a lifetime gift to the next generation. The removal of this may help to encourage succession within farming businesses and simplify the decision making process.

Mixed Businesses – Business Property Relief (BPR)

BPR can be a useful relief for farmers providing IHT relief for business assets which either do not attract APR or have some value in excess of their agricultural value.

Under current rules businesses can receive BPR at rates up to 100% if the business qualifies as a ‘wholly or mainly’ trading business. Broadly this means that over 50% of the business activities and asset base in the round, must relate to the trading part of the business as compared to the investment part of the business.

This rule effectively allows non trading assets such as let farm cottages to be sheltered from IHT if they form part of a larger trading business and this 50/50 test is much more generous than the test for CGT reliefs which requires trading activities to be 80%.

In their report, the OTS have recommended that it should be considered whether it is appropriate for the level of trading activity for BPR to be set at a lower level than the CGT reliefs.

Other recommended changes

Other changes which have been recommended include the following:

• The IHT treatment of furnished holiday lets (FHLs) has been contentious in recent years with it being held by the courts that considerable extra services are required to make the business BPR qualifying. This is despite the fact that FHLs have a special trading status for Income Tax and CGT.
  
  The OTS have suggested that the government consider aligning the IHT treatment of FHLs with the other tax treatment, potentially allowing BPR claims on these properties.
• The OTS suggests that HMRC should review their current approach to the qualifying status for APR where the farmer has had to leave his farmhouse in sensitive cases eg for medical treatment or to go into care. Under the current rules this can potentially put APR on the farmhouse at risk.
• The government should consider reducing the 7 year period after which lifetime gifts become exempt from IHT to 5 years and abolish taper relief which reduces the tax on gifts made between 3 and 7 years.

Whether any of these changes will actually take effect remains unclear as the OTS have made numerous recommendations for tax simplification since they were established in 2010 and many of these have been not been introduced. At present government resources are still focused on Brexit, and if a wider change in government occurs, more radical changes to IHT could happen instead.

Whatever the outcome, it is important that farmers make periodic reviews to ensure that the reliefs apply, and that the farming business has appropriate succession plans in place. Professional advice should be taken regularly to allow appropriate planning to be undertaken. If you would like to discuss further any of the issues covered in this article, please contact Mairi Drummond on (01573) 224391, or Mairi.drummond@renniewelch.co.uk.