Don’t rely on inheritance tax relief lasting indefinitely

Two mechanisms for reducing IHT could be under threat, warns Sharon Omer-Kaye.

The latest National Audit Office (NAO) report into tax reliefs might make uncomfortable reading for those wanting to pass their farm business on to the next generation.

Agricultural property relief (APR) and business property relief (BPR) reduce or remove liability to inheritance tax (IHT). They’re designed to ensure family businesses don’t have to be broken up and sold to pay IHT, but the NAO’s report raises concerns that these reliefs could be under threat.

Currently, if agricultural property (including farmland) qualifies, APR is available and, if a business qualifies, BPR is available. Both reliefs are given at 50% or 100%, depending on the circumstances.

The problem the NAO report identifies is that the value of these reliefs has grown faster than the amount of tax collected. The amount claimed for APR and BPR has doubled over the past five years whereas the amount of inheritance tax collected has remained approximately the same.

Land prices have continued to increase over the past decade and, in some areas, land has become a sought-after asset. The benefit of such ownership increases where land attracts 100% relief from IHT. There is a concern about the tax reduction obtained through the use of these reliefs and HMRC is continuing to take a hard line in challenging such claims. Reviewing your position early to maximise your relief is essential.

The findings have prompted the NAO to undertake future work on how tax reliefs are developed, implemented and administered, as well as evaluating how they’re used to avoid or evade tax. As many reliefs have remained un-changed for a long time, there’s a risk that this signals a change in political direction, and ultimately a watering down of available reliefs.

Where does this leave landowners and farmers today? For now, you can expect greater scrutiny of claims and must make sure claims for relief are, as far as possible, watertight and above board. Some may also want to give more thought to passing their business and assets to the next generation sooner rather than later.

As it stands, you can give away agricultural assets or property while you’re still alive without putting APR at risk, as long as the assets or property qualify for APR in the first place. If you give away agricultural assets or property in your lifetime and do not survive seven years from the date of gift, whoever you give them to must keep them as a going concern until you die in order for you to keep the relief. If you live for seven or more years after making a gift, anything you give away won’t be classed as part of your estate for IHT purposes.

The break-up of a family farm business can lead to significant financial, emotional and social effects. Giving some thought to succession planning now might help to avoid them.

Sharon Omer-Kaye is a tax partner at accountancy firm Baker Tilly.

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